SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934 [Fee Required]
For the fiscal year ended December 31, 1999.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act
of 1934 [No Fee required]
For the transition period from _______ to _______.
Commission file number 33-66014
FNB FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
COMMONWEALTH OF PENNSYLVANIA 23-2466821
(State or other jurisdiction of incorporation
(I.R.S. Employer
or organization)
Identification No.)
101 Lincoln Way West, McConnellsburg, PA
17233 (Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: 717-485-3123
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Class Outstanding as of March 15, 2000
Common Stock, $0.63 Par Value 400,000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ( 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of the
registrants as of March 6, 2000:
Common Stock, $0.63 Par Value - $20,000,000.00
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended December 31,
1999, are
incorporated by reference into Parts I, II and IV.
Portions of the proxy statement for the annual shareholders meeting to be
held
April 25, 2000, are incorporated by reference into Part III.
Portions of Form SB-2 Registration Statement No. 33-66014 as filed with the
Securities and Exchange Commission on September 8, 1993, are incorporated by
reference into Part IV.
A copy of a Common Stock Certificate of FNB Financial Corporation as
filed with the Securities and Exchange Commission with Form 10-K for
the fiscal year ended December
31, 1995 is incorporated by reference into Part IV.
PART I
Item 1. Business
Description of Business
FNB Financial Corporation (the Company), a Pennsylvania
business corporation, is a bank holding company
registered
with and supervised by the Board of Governors of the
Federal
Reserve System (the "Federal Reserve Board"). The
Company was
incorporated on June 22, 1987, under the business
corporation
law of the Commonwealth of Pennsylvania for the
purpose of
becoming a bank holding company. Since commencing
operations,
the Company's business has consisted primarily of
managing and
supervising The First National Bank of
McConnellsburg (the
Bank) and its principal source of income has been
dividends
paid by the Bank. The Company has one wholly-owned
subsidiary, the Bank.
The Bank was established in 1906 as a national
banking
association under the supervision of the Comptroller
of the
Currency, the Comptroller. The Bank is a member of
the
Federal Reserve System and customers' deposits held
by the
Bank are insured by the Federal Deposit Insurance
Corporation
to the maximum extent permitted by law. The Bank is
engaged
in a full service commercial and consumer banking
business
including the acceptance of time and demand deposits
and the
making of secured and unsecured loans. The Bank
provides its
services to individuals, corporations, partnerships,
associations, municipalities and other governmental
bodies.
As of January 1, 1999, the Bank had three (3)
offices and (1)
drive-up ATM located in Fulton County, one (1)
branch
office facility located in Fort Loudon, Franklin
County
Pennsylvania and one (1) branch office facility
located in
Hancock, Washington County, Maryland. During 1995
the Bank
received regulatory approval from The Comptroller to
purchase
and assume the deposits, real estate and building of
the Fort
Loudon Branch Office of Dauphin Deposit Bank located
in Franklin
County, Pennsylvania. Due to the location of
this office,
management and the Board felt the acquisition of
this office
was strategically important in order to officially
expand the
Bank's market area into the Franklin County, PA area
and
diversify its current primary market of Fulton
County, PA. It
is anticipated this office will generate new loan
and deposit
demand for the Bank in the coming years. During
1996 the Bank
received regulatory approval from The Comptroller to
open its
first interstate Branch office in Hancock, Maryland
after
management became aware of the closing of a branch
office of
First Federal Savings Bank of Western Maryland.
This office is
known as "Hancock Community Bank, A Division of The
First
National Bank of McConnellsburg". The location of
this office
is felt to be strategically important in order to
expand the
Bank's operations into Washington County, Maryland
and northern
Morgan County, West Virginia. This office will also
be the
Bank's first supermarket branch office. As soon as
the owner of
the adjacent supermarket completes extensive
renovations, the
wall between the branch office and the supermarket
will be
removed, allowing customers to enter the branch
directly from
the supermarket. This office is expected to enhance
demand for
the Bank's loan and deposit products as well as
retain deposits
of customers in southern Fulton County,
Pennsylvania.
The Bank received permission from the Comptroller to
expand its main office facilities in downtown
McConnellsburg
to allow for larger customer service, loan
department and data
processing areas. This expansion was completed on
September 1,
1996, at a cost of approximately $1,700,000. In
February 1999,
the Bank purchased an adjacent property to the main
office
facility at 115 Lincoln Way West in downtown
McConnellsburg from
the Fulton Overseas Veterans Association. This site
is 54' by
218' and has situated on it a three story building
comprised
of 4,577 usable square feet on the first floor and a
28' by 60'
finished basement. The second and third stories of
the building
are not usable. The Bank has no immediate plans for
this
facility but felt it was a wise decision to purchase
it for
strategic planning purposes. The Bank has one
wholly-owned
subsidiary, First Fulton County Community
Development
Corporation, which is a Community Development
Corporation formed
under 12USC24/2CFR24 whose primary regulator is the
Office of
the Comptroller of the Currency, The Comptroller.
The First
Fulton County Community Development Corporation was
incorporated
with the Commonwealth of Pennsylvania on May 30,
1995. The
primary business of this community development
corporation is to
provide and promote community welfare through the
establishment
and offering of low interest rate loan programs to
stimulate
economic rehabilitation and development for the
Borough of
McConnellsburg and the entire community of Fulton
County, PA.
Competition
Our primary market area includes all of Fulton
County
and portions of Huntingdon, Bedford and Franklin
Counties,
portions of Washington County, Maryland and portions
of Morgan
County, West Virginia. Our major competitor is a
one
bank holding company headquartered in
McConnellsburg,
Pennsylvania which has 7 branches located throughout
Fulton,
Franklin and Huntingdon Counties. As of December
31, 1999, we
were ranked second in total deposits when compared
to our major
competitor. Also, in this market area we compete
with
regionally-based commercial banks (all of which have
greater
assets, capital and lending limits), savings banks,
savings and
loan associations, money market funds, insurance
companies,
stock brokerage firms, regulated small loan
companies, credit
unions and with issuers of commercial paper and
other
securities.
Although deregulation has allowed us to become more
competitive
in the market place in regard to pricing of loan and
deposit
rates, there are disparities in taxing law which
give some of
our nonbank competitors advantages which commercial
banks do not
enjoy and many burdensome and costly regulations
with which we
must comply. We meet these challenges by developing
and
promoting our locally-owned community bank image; by
offering
friendly and professional customer service; and by
striving to
maintain competitive interest rates for both loans
and deposits.
Regulation and Supervision
Our operations are subject to the provisions of the
Bank Holding
Company Act of 1956, as amended (the "Bank Holding
Company
Act"), and to supervision by the Federal Reserve
Board. The
Bank Holding Company Act requires us to secure the
prior
approval of the Federal Reserve Board before we own
or control,
directly or indirectly, more than five percent (5%)
of the
voting shares of substantially all of the assets of
an
institution, including another bank. The Bank
Holding Company
Act prohibits acquisition by the Company of more
than five
percent (5%) of the voting shares of, or interest
in, all or
substantially all of the assets of any bank located
outside of
Pennsylvania unless such acquisition is specifically
authorized
by the laws of the state in which such bank is
located.
Our operations are subject to federal and state
statutes
applicable to banks chartered under the banking laws
of the
United States, to members of the Federal Reserve
System
and to banks whose deposits are insured by the FDIC.
Our
operations are also subject to regulations of the
Comptroller,
the Federal Reserve Board and the FDIC. Our primary
supervisory
authority is the Comptroller, which regulates and
examines us. The Comptroller has authority to prevent
national banks from
engaging in unsafe or unsound practices in
conducting their
businesses.
Legislation and Regulatory Changes
From time to time, legislation is enacted which has
the effect
of increasing the cost of doing business, limiting
or
expanding permissible activities or affecting the
competitive
balance between banks and other financial
institutions.
Proposals to change the laws and regulations
governing the
operations and taxation of banks, bank holding
companies and
other financial institutions are frequently made in
Congress,
and before various bank regulatory agencies. No
prediction
can be made as to the likelihood of any major
changes or the
impact such changes might have on the Company and
its
subsidiary, the Bank. Certain changes of potential
significance to the Company which have been enacted
recently
are discussed below.
The Federal Reserve Board, the FDIC and the
Comptroller have
issued risk-based capital guidelines, which
supplement
existing capital requirements. The guidelines
require all
United States banks and bank holding companies to
maintain a
minimum risk-based capital ratio of 8.0% (of which
at least
3.0% must be in the form of common stockholders'
equity).
Assets are assigned to five risk categories, with
higher
levels of capital being required for the categories
perceived
as representing greater risk. The required capital
will
represent equity and (to the extent permitted)
nonequity
capital as a percentage of total risk-weighted
assets. On the
basis of an analysis of the rules and the projected
composition of the Company's consolidated assets, it
is not
expected these rules will have a material effect on
the
Company's business and capital plans. The company
presently
has capital ratios exceeding all regulatory
requirements.
The Financial Institution Reform, Recovery and
Enforcement Act
of 1989 ("FIRREA") was enacted in August 1989. This
law was
enacted primarily to improve the supervision of
savings
associations by strengthening capital, accounting
and other
supervisory standards. In addition, FIRREA
reorganized the
FDIC by creating two deposit insurance funds to be
administered by the FDIC: the Savings Association
Insurance
Fund and the Bank Insurance Fund. Customers'
deposits held by
the Bank are insured under the Bank Insurance Fund.
FIRREA
also regulated real estate appraisal standards and
the
supervisory/enforcement powers and penalty
provisions in
connection with the regulation of the Bank.
In December 1991 the Federal Deposit Insurance
Corporation
Improvement Act of 1991 ("FDICIA") became law.
Under FDICIA,
institutions must be classified, based on their
risk-based
capital ratios into one of five defined categories
(well
capitalized, adequately capitalized,
undercapitalized,
significantly undercapitalized and critically
undercapitalized) as outlined below:
Total Tier 1
Under a
Risk- Risk- Tier
1 Capital
Based Based
Leverage Order or
Ratio Ratio Ratio
Directive
CAPITAL CATEGORY
Well capitalized >10.0% >6.0%
>5.0% No
Adequately capitalized > 8.0% >4.0%
>4.0%*
Undercapitalized < 8.0% <4.0%
<4.0%*
Significantly
Undercapitalized < 6.0% <3.0% <3.0%
Critically undercapitalized <2.0%
*3.0% for those banks having the highest available
regulatory rating.
Under FDICIA financial institutions are subject to
increased
regulatory scrutiny and must comply with certain
operational,
managerial and compensation standards to be
developed by
Federal Reserve Board Regulations. FDICIA also
required the
regulators to issue new rules establishing certain
minimum
standards to which an institution must adhere
including
standards requiring a minimum ratio of classified
assets to
capital, minimum earnings necessary to absorb losses
and
minimum ratio of market value to book value for
publicly held
institutions. Additional regulations are required
to be
developed relating to internal controls, loan
documentation,
credit underwriting, interest rate exposure, asset
growth and
excessive compensation, fees and benefits.
Annual full-scope, on-site examinations are required
for all
FDIC-insured institutions except institutions with
assets
under $100 million which are well capitalized, well
managed
and not subject to a recent change in control, in
which case,
the examination period is every eighteen (18)
months. FDICIA
also required banking agencies to reintroduce loan-
to-value
("LTV") ratio regulations which were previously
repealed by
the 1982 Act. LTV's will limit the amount of money
a
financial institution may lend to a borrower, when
the loan is
secured by real estate, to no more than a percentage
to be set
by regulation of the value of the real estate.
A separate subtitle within FDICIA, called the "Bank
Enterprise
Act of 1991", requires "truth-in-savings" on
consumer deposit
accounts so that consumers can make meaningful
comparisons
between the competing claims of banks with regard to
deposit
accounts and products. Under this provision which
became
effective on June 21, 1993, the Bank is required to
provide
information to depositors concerning the terms and
fees of
their deposit accounts and to disclose the annual
percentage
yield on interest-bearing deposit accounts.
Federal regulators recently issued proposed
regulations to
implement the privacy provisions of the Gramm-Leach-
Bliley Act
(Financial Services Modernization Act). This new
law requires
banks to notify consumers about their privacy
policies and to
give them an opportunity to "opt-out" or prevent the
bank from
sharing "nonpublic personal information" about them
with
nonaffiliated third parties. Proposed regulations
are expected
to take effect in November 2000. We are in the
process of
developing privacy policies and procedures to
provide timely
disclosure of such policies and a convenient means
for consumers
to opt our of the sharing of their information with
unaffiliated
third parties.
We do not anticipate compliance with environmental
laws and
regulations to have any material effect on their
respective
capital, expenditures, earnings, or competitive
position.
Employees
As of December 31, 1999, we employed 56 persons on a
full-time
equivalent basis.
Statistical Data
Computation of our regulatory capital requirements
for the
periods December 31, 1999, and December 31, 1998, on
page 33 of the annual shareholders report for the
year ended
December 31, 1999, is incorporated herein by
reference.
Loan Portfolio
We make loans to both individual consumers and
commercial
entities. The types offered include auto, personal,
mortgage,
home equity, school, home repair, small business,
commercial,
and home construction loans. Within these loans
types, we
make installment loans, which have set payments
allowing the
loan to be amortized over a fixed number of
payments, demand
loans, which have no fixed payment and which are
payable in full
on demand and are normally issued for a term of less
than one
year, and mortgage loans, which are secured with
marketable real
estate and have fixed payment amounts for a pre-
established
payment period.
We do not assume undue risk on any loan within the
loan
portfolio, and take appropriate steps to secure all
loans as
necessary.
We have adopted the following loan-to-value ratios,
in
accordance with standards adopted by our bank
supervisory
agencies:
Loan Category Loan-to-Value
Limit
Raw Land 65%
Land Development
75%
Construction:
Commercial, Multifamily, and other
Nonresidential 1 to 4 Family Residential
80%
Improved Property
85%
Owner-occupied 1 to 4 Family and Home Equity
90%
We are neither dependent upon nor exposed to loan
concentrations to a single customer or to a single
industry,
the loss of any one or more of which would have a
material
adverse effect on the financial condition of the
Bank;
however, a portion of the Bank's customers' ability
to honor
their contracts is dependent upon the construction
and land
development and agribusiness economic sector. As a
majority
of our loan portfolio is comprised of loans to
individuals and
businesses in Fulton County, PA, a significant
portion of our
customers' abilities to honor their contracts is
dependent upon
the general economic conditions in South Central
Pennsylvania.
Loan Portfolio composition as of December 31, 1999,
and
December 31, 1998, on page 14 of the annual
shareholders
report for the year ended December 31, 1999, is
incorporated
herein by reference.
Maturities of loans as of December 31, 1999, on page
15 of the
annual shareholders report for the year ended
December 31,
1999, is incorporated herein by reference.
Nonperforming loans consist of nonaccruing loans and
loans 90
days or more past due. Nonaccruing loans are
comprised of
loans that are no longer accruing interest income
because of
apparent financial difficulties of the borrower.
Interest on
nonaccruing loans is recorded when received only
after past
due principal and interest are brought current. Our
general
policy is to classify loans as nonaccrual when they
become past
due in principal and interest for over 90 days and
collateral is
insufficient to allow continuation of interest
accrual. At that
time, the accrued interest on the nonaccrual loan is
reversed
from the current year earnings and interest is not
accrued until
the loan has been brought current in accordance with
contractual terms.
Nonaccrual volume for 1999 increased $363,616 from
the December
31, 1998, level due to a $155,000 residential
mortgage loan and
several other residential mortgage loans which were
classified
as nonaccrual. Nonaccrual volume for 1998 decreased
$354,805
from December 31, 1997, due to a $125,000 loan
secured by a 1-4
family residential property in the Hagerstown, MD
area being
moved to Other Real Estate and sold in 1998; the
amount charged-
off as a result of this movement and sale was
approximately
$32,000; the charge-off in 1998 of a $100,000
commercial loan
secured by inventory; and the charge-off of a
$12,000 unsecured
line of credit. The remaining decrease in 1998 was
the result of
1-4 family mortgages classified as nonaccrual as of
December 31,
1997, being brought current.
Nonaccrual volume for 2000 is anticipated to
increase due to
some commercial loans and residential mortgage loans
which may
experience cash flow difficulties in 2000.
Anticipated charge-
offs for 2000 are expected to remain approximately
the same as
the total charge-offs in 1999 of $201,000.
Nonaccrual, Past Due and Restructured Loans as of
December 31,
1999, December 31, 1998, and December 31, 1997, on
page 15 of
the annual shareholders report for the year ended
December
31, 1999, are incorporated herein by reference.
Allowance for Loan Loss Analysis
The allowance for loan losses is maintained at a
level to
absorb potential future loan losses contained in the
loan
portfolio and is formally reviewed by us on a
quarterly basis.
The allowance is increased by provisions charged to
operating
expense and reduced by net charge-offs. Our basis
for the level
of the allowance and the annual provisions is our
evaluation of
the loan portfolio, current and projected domestic
economic
conditions, the historical loan loss experience,
present and
prospective financial condition of the borrowers,
the level of
nonperforming assets, best and worst case scenarios
of possible
loan losses and other relevant factors. While we
use available
information to make such evaluations, future
adjustments of the
allowance may be necessary if economic conditions
differ
substantially from the assumptions used in making
the
evaluation. Loans are charged against the allowance
for loan
losses when we believe that the collectability of
the principal
is unlikely.
Activity in the allowance for loan losses and a
breakdown of
the allowance for loan losses as of December 31,
1999, and
December 31, 1998, on page 15 of the annual
shareholders
report for the year ended December 31, 1999, are
incorporated
herein by reference.
Although loans secured by 1-4 family residential
mortgages
comprise approximately 51% of the entire loan
portfolio, until
recently these mortgages have historically resulted
in little or
no loss. The allocation of the Allowance for Loan
Losses for
these mortgages is based upon this historical fact.
Due to a
more critical evaluation of our commercial,
industrial, and
agricultural loan portfolio, the allocation of the
Allowance
for Loan Losses for commercial, industrial, and
agriculture
loans has been accordingly increased.
Deposits
Time Certificates of Deposit of $100,000 and over as
of
December 31, 1999, and December 31, 1998, totaled
$12,292,000
and $11,231,000 respectively.
Maturities and rate sensitivity of total interest
bearing
liabilities as of December 31, 1999, on page 32 of
the annual
shareholders report for the year ended December 31,
1999, is
incorporated herein by reference.
Returns on Equity and Assets
Returns on equity and assets and other statistical
data for
1999, 1998 and 1997 on page 20 of the annual
shareholders
report for the year ended December 31, 1999, is
incorporated
herein by reference.
Item 2. Properties
The physical properties where the Bank conducts its
business
in the Commonwealth of Pennsylvania are all owned by
the
Bank while the property where the Bank conducts its
business
in the State of Maryland is leased. The properties
owned by the
Bank are as follows: the main office located at 101
Lincoln Way
West, McConnellsburg, Pennsylvania, has been
attached by a two
story brick and frame addition, to a building
located at 111
South Second Street, McConnellsburg, Pennsylvania
which houses
the Bank's loan department on the first floor and
future
expansion space on the second floor; a property
adjacent
to the main office facility at 115 Lincoln Way West
in downtown
McConnellsburg comprised of a 54' by 218' city lot
which has
situated on it a three story building consisting of
4,577
usable square feet on the first floor, a 28' by 60'
finished basement, second and third stories which
are unusable
and a detached garage; a branch office located on
Route 522
South, Needmore, Pennsylvania; a property located at
Routes 16
and 30 East, McConnellsburg, Pennsylvania which
contains a
drive-up automatic teller machine and a five (5)
lane drive-up
branch accessible from both Route 30 and Route 16;
and a branch
office located at 30 Mullen Street, Fort Loudon,
Pennsylvania,
for which the Bank received regulatory approval from
the Office
of the Comptroller of the Currency to purchase
effective
November 13, 1995. The branch office leased by the
Bank in the
state of Maryland is located in the Hancock Shopping
Center at
343 North Pennsylvania Avenue in Hancock, Maryland
next to a
supermarket.
The main office located in downtown McConnellsburg
is housed
in a two story brick and frame building, consisting
of
approximately 28,277 square feet. It has been
attached (by a
two story brick and frame addition which houses the
data
processing/operations center on the first floor and
executive
offices and a meeting room on the second floor) to
the
building located at 111 South Second Street, a brick
and frame
building situated on a one town lot which has been
expanded
and renovated to house the loan department on the
first floor
and future offices and rest rooms on the second
floor. The
main office contains one (1) external time and
temperature
sign, seven (7) internal teller stations, a customer
service
office area, executive offices, one (1) drive-up
teller station,
an automatic teller machine, three (3) vaults (one
containing
safe deposit boxes for customer use and one
containing a fire
proof/data-secure vault in the operations center), a
night
depository, a data processing center with a security
controlled
computer operations center, a loan department with a
large file
room, a kitchen and a 5,000 square foot basement
storage
area.
The Needmore Branch Office, a brick and frame
building
situated on approximately five (5) acres, consists
of
approximately 3,000 square feet, of which 750 square
feet is
rented as office space. The branch office houses
three (3)
internal teller stations, one (1) drive-up teller
station, a
customer service office area, one (1) vault which
contains
safe deposit boxes for customer use, one (1)
kitchen, and
storage areas.
The East End Express Banking Center, located on a
property of
approximately 68,000 square feet at Routes 16 and
30, has
situated on it one (1) drive-up automatic teller
machine and
one (1) night depository (both housed in a brick and
frame
building of approximately 121 square feet), and a
drive-up
branch office, a brick and frame building of
approximately 576
square feet, which contains four (4) drive-up teller
stations
with the potential for a total of five (5) drive-up
teller
stations in the future.
The Fort Loudon Branch Office, which was expanded
and completely
renovated in 1997 at an approximate cost of
$200,000, is a brick
and frame building situated on approximately .23
acres. It
consists of approximately 1,035 square feet. The
branch office
houses three (3) internal teller stations, one (1)
drive-up
teller station, one (1) vault which contains safe
deposit
boxes for customer use, a manager's office, one (1)
kitchen,
storage areas and a basement for storage which
consists of
approximately 620 square feet.
The leased office in Hancock, Maryland housing
Hancock Community
Bank is approximately 1,400 square feet and is
leased from the
owner of the shopping center next to a supermarket.
It contains
two (2) offices, one (1) automated teller machine,
two (2)
drive-up teller lanes, a lobby, a safe deposit box
vault for
customers and three (3) teller stations.
Item 3. Legal Proceedings
In our opinion, there are no proceedings pending to
which the
Company or the Bank is a party or to which our
property is
subject, which, if determined adversely to the
Company or the
Bank, would be material in relation to the our
retained earnings
or financial condition. There are no proceedings
pending other
than ordinary routine litigation incident to our
business.
In addition, no material proceedings are known to be
threatened
or contemplated against the us by government
authorities.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters
Our common stock is not traded on a national securities
exchange
but is traded inactively in the over-the-counter
market and is
only occasionally and sporadically traded through
local and
regional brokerage houses or through the facilities
of the Bank.
The Stock Market Analysis and Dividends for 1999 and
1998 on
page 34 of the annual shareholders report for the
year ended
December 31, 1999, is incorporated herein by
reference.
Item 6. Selected Financial Data
The Selected Five-Year Financial Data on page 20 of
the annual
shareholders report for the year ended December 31,
1999, is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial
Condition
and Results of Operations
Management's discussion and analysis of financial
condition
and results of Operations on pages 25 through 36 of
the annual
shareholders report for the year ended December 31,
1999, is
incorporated herein by reference. This discussion
includes an
extensive analysis and review of the Corporation's
Year 2000
Readiness Plan.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data,
some of which
is required under Guide 3 (Statistical Disclosures
by Bank
Holding Companies) are shown on pages 6 through 24
of the
annual shareholders report for the year ended
December 31, 1999,
are incorporated herein by reference.
The Summary of Quarterly Financial Data on page 21
of the
annual shareholders report for the year ended
December 31,
1999, is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on
Accounting
and Financial Disclosure
None.
PART III
Item 10. Directors and Officers of the Registrant
The information contained on pages 3 through 15 of
FNB
Financial Corporation's Proxy Statement For the
Annual Meeting
of Shareholders to be Held April 25, 2000, with
respect to
directors and executive officers of the Company, is
incorporated herein by reference in response to
this item.
Item 11. Executive Compensation
The information contained on pages 9 through 13 of
FNB
Financial Corporation's Proxy Statement For the
Annual Meeting
of Shareholders to be Held April 25, 2000, with
respect to
executive compensation, transactions and contracts,
is
incorporated herein by reference in response to
this item.
Item 12. Security Ownership of certain Beneficial Owners and
Management
The information contained on pages 3 through 5 and
pages 14 and
15 of FNB Financial Corporation's Proxy Statement
For the
Annual Meeting to be Held April 25, 2000, with
respect to
security ownership of certain beneficial owners and
management,
is incorporated herein by reference in response to
this item.
Item 13. Certain Relationships and Related Transactions
The information contained on pages 7, 8, and 14 of
FNB
Financial Corporation's Proxy Statement For the
Annual Meeting
to be Held April 25, 2000, with respect to certain
relationships and related transactions, is
incorporated herein
by reference in response to this item.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports of Form
8-k.
(a) (1) - List of Financial Statements
The following consolidated financial statements of
FNB
Financial Corporation and its subsidiary, included
in the
annual report of the registrant to its shareholders
for the
year ended December 31, 1999, are incorporated by
reference
in Item 8:
Consolidated balance sheets - December 31, 1999,
and 1998
Consolidated statements of income - Years ended
December 31,
1999, 1998 and 1997
Consolidated statements of stockholders' equity -
Years
ended December 31, 1999, 1998 and 1997
Consolidated statements of cash flows - Years
ended December
31, 1999, 1998 and 1997
Notes to consolidated financial statements -
December 31,
1999
(2) - List of Financial Statement Schedules
Schedule I - Marketable Securities - Other
Investments
Schedule III - Condensed Financial
Information of
Registrant
Schedule VIII - Valuation and Qualifying
Accounts
All other schedules for which provision is
made in
the applicable accounting regulation of the
Securities and Exchange Commission are not
required
under the related instructions or are
inapplicable
and therefore have been omitted.
(3) Listing of Exhibits
Exhibit (3)(i) Articles of incorporation
Exhibit (3)(ii) Bylaws
Exhibit (4) Instruments defining the rights of
security holders including indentures
Exhibit (10) Material Contracts
Exhibit (22) Subsidiaries of the registrant
All other exhibits for which provision is
made in
the applicable accounting regulation of
the
Securities and Exchange Commission are not
required
under the related instructions or are
inapplicable
and therefore have been omitted.
(b) Reports on Form 8-K filed
None.
(c) Exhibits
Exhibit (3)(i) Articles of incorporation -
Exhibit 3A
of Form SB-2 Registration Statement No. 33-
66014 are
incorporated herein by reference.
Exhibit (3)(ii) Bylaws - Exhibit 3B of Form
SB-2
Registration Statement No. 33-66014 are
incorporated
herein by reference.
Exhibit (4) Instruments defining the rights
of
security holders including debentures -
Document #1 of
Form 10-K for FNB Financial Corporation for
fiscal year
ended December 31, 1995 is incorporated
herein by
reference.
Exhibit (10.1) Executive Supplemental
Retirement Plan for
Select Officers - incorporated herein by
reference.
Exhibit (10.2) Director Fee Continuation
Agreement for
Select Directors - incorporated herein by
reference.
Exhibit (13) Annual report to security
holders -
incorporated herein by reference.
Exhibit (22) Subsidiaries of the registrant -
As of
this report, The First National Bank of
McConnellsburg is the only subsidiary of the
Registrant and is explained further within
the
Business Section (Item 1) of this report.
The First National Bank of McConnellsburg has
one
subsidiary as of the date of this report,
First
Fulton County Community Development
Corporation and
is explained further within the Business
Section
(Item 1) of this report.
(d) Financial Statement Schedules
Schedule I - Marketable Securities - Other
Investments
Schedules of Marketable Securities included
on pages
13 and 14 of the annual report of the
registrant to its
shareholders for the year ended December 31,
1999,
are incorporated herein by reference.
Schedule III - Condensed Financial
Information of
Registrant
Condensed Financial Information of the
Registrant
included on page 17 and 18 of the annual
report of the
registrant to its shareholders for the year
ended
December 31, 1999, is incorporated herein by
reference.
Schedule VIII - Valuation and Qualifying
Accounts
The schedule of the Allowance for Loan losses
included
on page 15 of the annual report of the
registrant to
its shareholders for the year ended December
31,
1999, is incorporated herein by reference.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FNB FINANCIAL CORPORATION
(Registrant)
/s/John C. Duffey
3/8/2000
John C. Duffey Date
Director and President
of the Corporation
President & CEO of the Bank
(Principal Executive
Officer)
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and
on the dates indicated.
/s/H. Lyle Duffey 3/8/2000 /s/Henry W. Daniels
3/8/2000
H. Lyle Duffey Date Henry W. Daniels
Date
Director, Chairman Director, Vice Chairman
/s/John C. Duffey 3/8/2000 /s/Harry D. Johnston
3/8/2000
John C. Duffey Date Harry D. Johnston, D.
O. Date
Director, President Director, Vice
President
/s/George S. Grissinger 3/8/2000 /s/Patricia A. Carbaugh
3/8/2000
George S. Grissinger Date Patricia A. Carbaugh
Date
Director, Secretary Director
Harvey J. Culler /s/Forrest R. Mellott
3/8/2000
Harvey J. Culler Date Forrest R. Mellott
Date
Director Director
/s/Lonnie W. Palmer 3/8/2000 /s/Paul T. Ott
3/8/2000
Lonnie W. Palmer Date Paul T. Ott
Date
Director Director
/s/D. A. Washabaugh, III 3/8/2000 /s/Daniel E. Waltz
3/8/2000
D. A. Washabaugh, III Date Daniel E. Waltz
Date
Director Director, Treasurer
(Principal Financial
and
Accounting Officer)
EXECUTIVE SUPPLEMENTAL RETIREMENT PLAN
AGREEMENT
This Agreement, made and entered into this 3rd day of March, 1998, by and
between
First National Bank of McConnellsburg, a Bank organized and existing under the
laws of the
State of Pennsylvania hereinafter referred to as "the Bank", and John C.
Duffey, a Key Employee
and the Executive of the Bank, hereinafter referred to as "the Executive".
The Executive has been in the employ of the Bank for several years and has now
and for
years past faithfully served the Bank. It is the consensus of the Board of
Directors of the Bank
(the Board) that the Executive's services have been of exceptional merit, in
excess of the
compensation paid and an invaluable contribution to the profits and position of
the Bank in its
field of activity. The Board further believes that the Executive's experience,
knowledge of
corporate affairs, reputation and industry contacts are of such value and his
continued services
are so essential to the Bank's future growth and profits that it would suffer
severe financial loss
should the Executive terminate his services.
Accordingly, it is the desire of the Bank and the Executive to enter into this
Agreement
under which the Bank will agree to make certain payments to the Executive upon
his retirement
and, alternatively, to his beneficiary(ies) in the event of his premature death
while employed by
the Bank.
It is the intent of the parties hereto that this Agreement be considered an
arrangement
maintained primarily to provide supplemental retirement benefits for the
Executive, as a member
of a select group of management or highly-compensated employees of the Bank for
purposes of
the Employee Retirement Security Act of 1974 (ERISA). The Executive is fully
advised of the
Bank's financial status and has had substantial input in the design and
operation of this benefit
plan.
Therefore, in consideration of the Executive's services performed in the past
and those to
be performed in the future and based upon the mutual promises and covenants
herein contained,
the Bank and the Executive, agree as follows:
I. DEFINITIONS
A. Effective Date:
The Effective Date of this Agreement shall be March 3, 1998.
B. Plan Year:
Any reference to "Plan Year" shall mean a calendar year from January 1 to
December 31. In the year of implementation, the term "Plan Year" shall mean the
period from the effective date to December 31 of the year of the effective date.
C. Retirement Date:
Retirement Date shall mean retirement from service with the Bank which becomes
effective on the first day of the calendar month following the month in which
the
Executive reaches his sixtieth (60th) birthday or such later date as the
Executive may
actually retire.
D. Termination of Service:
Termination of Service shall mean voluntary resignation of service by the
Executive
or the Bank's discharge of the Executive without cause ["cause" defined in
Subparagraph III (D) hereinafter], prior to the Normal Retirement Age
[described in
Subparagraph I (J) hereinafter].
E. Pre-Retirement Account:
A Pre-Retirement Account shall be established as a liability reserve account on
the
books of the Bank for the benefit of the Executive. Prior to termination of
service or
the Executive's retirement, such liability reserve account shall be increased
each Plan
Year (including the Plan Year in which the Executive ceases to be employed by
the
Bank) by an amount equal to the annual earnings for that Plan Year determined
by
the Index [described in Subparagraph I (G) hereinafter], less the Cost of Funds
Expense for that Plan Year [described in Subparagraph I (H) hereinafter]. The
amount of the increase of said account shall depend on the account balance. In
the
event that there is a negative or zero account balance, then the increase, if
any, shall
be the difference between earnings (determined as set forth above) of that year
and
the negative account balance, until said account balance is positive. When the
account balance is positive, then no loss will be recorded to the existing
balance.
The existing balance will remain constant through any loss and, in the event
there are
earnings in any year, said positive account will be increased by the total
amount of
earnings (determined as set forth above) without subtracting any loss.
F. Index Retirement Benefit:
The Index Retirement Benefit for the Executive for any year shall be equal to
the
excess of the annual earnings (if any) determined by the Index [Subparagraph I
(G)]
for that Plan Year over the Cost of Funds Expense [Subparagraph I (H)] for that
Plan
Year.
G. Index:
The Index for any Plan Year shall be the aggregate annual after-tax income from
the
life insurance contracts described hereinafter as defined by FASB Technical
Bulletin
85-4. This Index shall be applied as if such insurance contracts were purchased
on
the effective date hereof
Insurance Company: Security Life of Denver
Policy Form: Whole Life
Policy Name: Corp 4
Insured's Age and Sex: 44, Male
Riders: None
Ratings: None
Face Amount: $1,216,274
Premiums Paid: $462,000
Number of Premium Payments: One
Assumed Purchase Date: March 2, 1998
If such contracts of life insurance are actually purchased by the Bank then the
actual
policies as of the dates they were purchased shall be used in calculations under
this
Agreement. If such contracts of life insurance are not purchased or are
subsequently
surrendered or lapsed, then the Bank shall receive annual policy illustrations
that
assume the above described policies were purchased from the above named
insurance company(ies) on the Effective Date from which the increase in policy
value will be used to calculate the amount of the Index.
In either case, references to the life insurance contract are merely for
purposes of
calculating a benefit. The Bank has no obligation to purchase such life
insurance
and, if purchased, the Executive and his beneficiary(ies) shall have no
ownership
interest in such policy and shall always have no greater interest in the
benefits
under this Agreement than that of an unsecured general creditor of the Bank.
H. Cost of Funds Expense:
The Cost of Funds Expense for any Plan Year shall be calculated by taking the
sum of the amount of premiums set forth in the Indexed policies described above
plus the amount of any after-tax benefits paid to the Executive pursuant to
this
Agreement (Paragraph III hereinafter) plus the amount of all previous years
after-tax Costs of Funds Expense, and multiplying that sum by the average after-
tax cost of funds of the Bank's third quarter Call Report for the Plan Year as
filed
with the Federal Reserve.
I. Change of Control:
Change of control shall be deemed to be the cumulative transfer of more than
twenty-five percent (25%) of the voting stock of the Bank Holding Company
from the Effective Date of this Agreement. For the purposes of this Agreement,
transfers on account of deaths or gifts, transfers between family members or
transfers to a qualified retirement plan maintained by the Bank shall not be
considered in determining whether there has been a change in control.
J. Normal Retirement Age:
Normal Retirement Age shall mean the date on which the Executive attains age
sixty (60).
II. EMPLOYMENT
No provision of this Agreement shall be deemed to restrict or limit any
existing
employment agreement by and between the Bank and the Executive, nor shall any
conditions herein create specific employment rights to the Executive nor limit
the right
of the Employer to discharge the Executive with or without cause. In a similar
fashion,
no provision shall limit the Executive's rights to voluntarily sever his
employment at any
time.
III. INDEX BENEFITS
The following benefits provided by the Bank to the Executive are in the nature
of a
fringe benefit and shall in no event be construed to effect nor limit the
Executive's
current or prospective salary increases, cash bonuses or profit-sharing
distributions or
credits.
A. Retirement Benefits:
Should the Executive continue to be employed by the Bank until his "Normal
Retirement Age" defined in Subparagraph I (J), the Executive shall be entitled
to
receive the balance in his Pre-Retirement Account [as defined in Subparagraph I
(E)] and he shall have the option, to be exercised at least one (1) year
preceding
the date of the first benefit payment, to receive said balance in his Pre-
Retirement Account in either a lump sum, or five (5) or ten (10) equal annual
installments commencing thirty (30) days following the Executive's Retirement
Date. In the event that the Executive fails to exercise said option within the
time
period above, then the payments shall be made as set forth herein in ten (10)
equal annual installments. In addition to these payments, commencing with the
Plan Year in which the Executive attains his Retirement Date, the Index
Retirement Benefit [as defined in Subparagraph I (F) above] for each year shall
be paid to the Executive until his death.
B. Termination of Service:
Subject to Subparagraph III (D) hereinafter, should the Executive suffer a
termination of service [defined in Subparagraph I (D)], he shall be entitled to
receive fifty percent (50%) at the time of the plan implementation, plus an
additional ten percent (10%) times the number of full years the Executive has
served from the date of the plan implementation (to a combined maximum of
100%) with the Bank, times the balance in the PreRetirement Account paid over
ten (10) years in equal installments commencing at the Retirement Date
[Subparagraph I (C)]. In addition to these payments, subject to Subparagraph
III
(D) hereinafter, fifty percent (50%) at the time of plan implementation, plus
an
additional ten percent (10%) times full years of service with the Bank since
the
date of the plan implementation (to a combined maximum of 100%), times the
Index Retirement Benefit for each year shall be paid to the Executive until his
death.
C. Death:
Should the Executive die prior to having received the full balance of the Pre-
Retirement Account, the unpaid balance of the Pre-Retirement Account shall be
paid in a lump sum to the beneficiary(ies) selected by the Executive and filed
with the Bank. In the absence of or a failure to designate a beneficiary(ies),
the
unpaid balance shall be paid in a lump sum to the personal representative of
the
Executive's estate.
D. Discharge for Cause:
Should the Executive be discharged for cause at any time prior to his
Retirement
Date, all Index Benefits under this Agreement [Subparagraphs III (A), (B) or
(C)] shall be forfeited. The term "for cause" shall mean the conviction of a
felony or gross misdemeanor involving fraud, dishonesty or willful violation of
any law that results in any adverse effect on the Bank. If a dispute arises as
to
discharge "for cause", such dispute shall be resolved by arbitration as set
forth in
this Agreement.
E. Death Benefit:
Except as set forth above, there is no death benefit provided under this
Agreement.
IV. RESTRICTIONS UPON FUNDING
The Bank shall have no obligation to set aside, earmark or entrust any fund or
money with
which to pay its obligations under this Agreement. The Executive, his
beneficiary(ies) or
any successor in interest to him shall be and remain simply a general creditor
of the Bank
in the same manner as any other creditor having a general claim for matured and
unpaid
compensation.
The Bank reserves the absolute right, at its sole discretion, to either fund the
obligations
undertaken by this Agreement or to refrain from funding the same and to
determine the
exact nature and method of such funding. Should the Bank elect to fund this
Agreement,
in whole or in part, through the purchase of life insurance, mutual funds,
disability policies
or annuities, the Bank reserves the absolute right, in its sole discretion, to
terminate such
funding at any time, in whole or in part. At no time shall the Executive be
deemed to have
any lien or right, title or interest in or to any specific funding investment or
to any assets of
the Bank.
If the Bank elects to invest in a life insurance, disability or annuity policy
upon the life of
the Executive, then the Executive shall assist the Bank by freely submitting to
a physical
exam and supplying such additional information necessary to obtain such
insurance or
annuities.
V. CHANGE OF CONTROL
Upon a Chance of Control [as defined in Subparagraph I (I) herein], if the
Executive's
employment is subsequently terminated then he shall receive the benefits
promised in this
Agreement upon attaining Normal Retirement Age, as if he had been continuously
employed by the Bank until his Normal Retirement Age. The Executive will also
remain
eligible for all promised death benefits in this Agreement. In addition, no
sale, merger or
consolidation of the Bank shall take place unless the new or surviving entity
expressly
acknowledges the obligations under this Agreement and agrees to abide by its
terms.
VI. MISCELLANEOUS
A. Alienability and Assignment Prohibition:
Neither the Executive, his/her surviving spouse nor any other beneficiary(ies)
under
this Agreement shall have any power or right to transfer, assign, anticipate,
hypothecate, mortgage, commute, modify or otherwise encumber in advance any of
the
benefits payable hereunder nor shall any of said benefits be subject to seizure
for the
payment of any debts, judgments, alimony or separate maintenance owed by the
Executive or his beneficiary(ies), nor be transferable by operation of law in
the event
of bankruptcy, insolvency or otherwise. In the event the Executive or any
beneficiary(ies) attempts assignment, commutation, hypothecation, transfer or
disposal
of the benefits hereunder, the Bank's liabilities shall forthwith cease and
terminate.
B. Binding Obligation of Bank and any Successor in Interest:
The Bank expressly agrees that it shall not merge or consolidate into or with
another
bank or sell substantially all of its assets to another bank, firm or person
until such
bank, firm or person expressly agrees, in writing, to assume and discharge the
duties
and obligations of the Bank under this Agreement. This Agreement shall be
binding
upon the parties hereto, their successors, beneficiary(ies), heirs and personal
representatives.
C. Revocation:
It is agreed by and between the parties hereto that, during the lifetime of the
Executive,
this Agreement may be amended or revoked at any time or times, in whole or in
part,
by the mutual written assent of the Executive and the Bank.
D. Gender:
Whenever in this Agreement words are used in the masculine or neuter gender,
they
shall be read and construed as in the masculine, feminine or neuter gender,
whenever
they should so apply.
E. Effect on Other Bank Benefit Plans:
Nothing contained in this Agreement shall affect the right of the Executive to
participate in or be covered by any qualified or non-qualified pension, profit-
sharing,
group, bonus or other supplemental compensation or fringe benefit plan
constituting a
part of the Bank's existing, or future compensation structure.
F. Headings:
Headings and subheadings in this Agreement are inserted for reference and
convenience only and shall not be deemed a part of this Agreement.
G. Applicable Law:
The validity and interpretation of this Agreement shall be governed by the laws
of the
State of Pennsylvania.
VII. ERISA PROVISION
A. Named Fiduciary and Plan Administrator:
The "Named Fiduciary and Plan Administrator" of this Plan shall be First
National
Bank of McConnellsburg until its removal by the Board. As Named Fiduciary and
Administrator, the Bank shall be responsible for the management, control and
administration of the Salary Continuation Agreement as established herein. The
Named Fiduciary may delegate to others certain aspects of the management and
operation responsibilities of the plan including the employment of advisors and
the
delegation of ministerial duties to qualified individuals.
B. Claims Procedure and Arbitration:
In the event a dispute arises over benefits under this Agreement and benefits
are not
paid to the Executive (or to his beneficiary in the case of the Executive's
death) and
such claimants feel they are entitled to receive such benefits, then a written
claim must
be made to the Plan Administrator named above within ninety (90) days from the
date
payments are refused. The Plan Administrator shall review the written claim and
if the
claim is denied, in whole or in part, they shall provide in writing within
ninety (90)
days of receipt of such claim their specific reasons for such denial, reference
to the
provisions of this Agreement upon which the denial is based and any additional
material or information necessary to perfect the claim. Such written notice
shall
further indicate the additional steps to be taken by claimants if a further
review of the
claim denial is desired. A claim shall be deemed denied if the Plan
Administrator fails
to take any action within the aforesaid ninety-day period.
If claimants desire a second review they shall notify the Plan Administrator in
writing
within ninety (90) days of the first claim denial. Claimants may review this
Agreement
or any documents relating thereto and submit any written issues and comments
they
may feel appropriate. In its sole discretion, the Plan Administrator shall then
review
the second claim and provide a written decision within ninety (90) days of
receipt of
such claim. This decision shall likewise state the specific reasons for the
decision and
shall include reference to specific provisions of this Agreement upon which the
decision is based.
If claimants continue to dispute the benefit denial based upon completed
performance
of this Agreement or the meaning and effect of the terms and conditions thereof,
then
claimants may submit the dispute to a Board of Arbitration for final
arbitration. Said
Board shall consist of one member selected by the claimant, one member selected
by
the Bank, and the third member selected by the first two members. The Board
shall
operate under any generally recognized set of arbitration rules. The parties
hereto
agree that they and their heirs, personal representatives, successors and
assigns shall be
bound by the decision of such Board with respect to any controversy properly
submitted to it for determination.
Where a dispute arises as to the Bank's discharge of the Executive "for cause",
such
dispute shall likewise be submitted to arbitration as above described and the
parties
hereto agree to be bound by the decision thereunder.
IN WITNESS WHEREOF, the parties hereto acknowledge that each has carefully read
this Agreement and executed the original thereof on the 3rd day of
March, 1998 and that, upon execution, each has received a
conforming copy.
FIRST NATIONAL BANK
OF MCCONNELLSBURG
By:
Witness Title
Witness John C. Duffey
DIRECTOR FEE CONTINUATION AGREEMENT
THE AGREEMENT, made and entered into this 3rd day of March, 1998 by and between
First National Bank of McConnellsburg, a Pennsylvania Bank (hereinafter called
"Bank"), and H.
Lyle Duffey (hereinafter called the "Director").
WITNESSETH:
WHEREAS, the Director has been and continues to be a valued Director of the
Bank, and is now serving the Bank as a Director: and,
WHEREAS, it is the consensus of the Board of Directors that the Director's
services to
the Bank in the past have been of exceptional merit and have constituted an
invaluable
contribution to the general welfare of the Bank and in bringing it to its
present status of operating
efficiency, and its present position in its field of activity; and,
WHEREAS, the experience of the Director, his knowledge of the affairs of the
Bank, his
reputation and contacts in the industry are of such value that the Bank would
suffer if the
Director terminated his service with the Bank; and,
WHEREAS, it is the desire of the Bank that his services be retained as herein
provided,
and,
WHEREAS, the Director is willing to continue in the employ of the Bank provided
the
Bank agrees to pay to him or his beneficiaries certain benefits in accordance
with the terms and
conditions hereinafter set forth:
ACCORDINGLY, it is the desire of the Bank and the Director to enter into this
agreement under which the Bank will agree to make certain payments to the
Director at
retirement or his beneficiary in the event of his premature death while employed
by the Bank;
and,
FURTHERMORE, it is the intent of the parties hereto that this agreement be
considered an unfunded arrangement maintained primarily to provide
supplemental benefits for the Director, as a member of a select
group of management or highly compensated employees of the Bank
for the purposes of the Employee Retirement Income Security Act of
1974, (E.R.I.S.A.):
NOW, THEREFORE, in consideration of services performed in the past and to be
performed in the future as well as of the mutual promises and covenants herein
contained it is
agreed as follows:
I. EMPLOYMENT
The Bank agrees to employ the Director in such capacity as the Bank may from
time to
time determine. The Director will continue in the employ of the Bank in such
capacity
and with such duties and responsibilities as may be assigned to him, and with
such
compensation as may be determined from time to time by the Board of Directors of
the
Bank. Active employment shall include temporary disability not to exceed six
months
and other "leave of absences" specifically granted by the Board of Directors.
1
II. FRINGE BENEFITS
The salary continuation benefits provided by this agreement are granted by the
Bank as a fringe benefit to the Director and are not part of any salary
reduction
plan or an arrangement deferring a bonus or a salary increase. The Director
has
no option to take any current payment or bonus in lieu of these salary
continuation benefits except as set forth hereinafter.
III. RETIREMENT DATE
The Director's Retirement Date shall mean retirement from service on the Board
of Directors of the Bank (the Board) which becomes effective on the first day
of
the calendar month following the month in which the Director reaches age eighty
(80) or such later date as the Director may actually retire.
IV. RETIREMENT BENEFIT AND POST-RETIREMENT DEATH BENEFIT
Upon said retirement the Bank, commencing with the first day of the month
following the date of such retirement, shall pay Director an annual benefit
equal
to $5,028.00 immediately prior to retirement for a period of ten (10) years,
provided that if less than ten (10) such annual payments have been made prior
to
the death of the Director, the Bank shall continue such annual payments to
whomever the Director shall designate in writing and filed with the Bank, until
the full number of ten (10) annual payments have been made. In the absence of
any effective designation of beneficiary, any such amounts becoming due and
payable upon the death of the Director shall be payable to the duly qualified
executor or administrator of his estate.
V. DEATH BENEFIT PRIOR TO RETIREMENT
In the event the Director should die while actively employed by the Bank at any
time
after the date of this Agreement but prior to attaining age eighty (80) (or such
later age as
may be agreed upon) the Bank will pay an annual benefit equal to the accrued
balance of
the Director's liability reserve account multiplied by the Director's cumulative
vested
percentage (number of years times annual vesting percentage to a maximum of
100%)
payable immediately after his death in a lump sum to such individual or
individuals as
the Director may have designated in writing and filed with the Bank. In the
absence of
any effective designation of beneficiary, any such amounts becoming due and
payable
upon the death of the Director shall be payable to the duly qualified executor
or
administrator of his estate. Provided, however, that anything hereinabove to
the contrary
notwithstanding, no death benefit shall be payable hereunder if it is determined
that the
Director's death was caused by suicide on or before March 3, 1998.
VI. BENEFIT ACCOUNTING
The Bank shall account for this benefit using the regulatory accounting
principles of the Bank's primary federal regulator. The Bank shall establish
an
accrued liability retirement account for the Director into which appropriate
reserves shall be accrued.
VII. VESTING
Director's interest in the benefits that are the subject of this Agreement shall
be
subject to an annual vesting percentage of ten percent (10%) per year
commencing on the date of the Director's first election to the Board of the
Bank.
2
VIII. OTHER TERMINATION OF EMPLOYMENT
Subject to Subparagraph VIII(A) herein, in the event that the employment of the
Director shall terminate prior to retirement from active employment, as provided
in Paragraph III, by his voluntary action, or by his discharge by the Bank, then
this Agreement shall terminate upon the date of such termination of employment
and the Bank shall pay to the Director as severance compensation an amount of
money equal to the accrued balance of Director's liability reserve account
multiplied by Director's cumulative vested percentage (number of years times
annual vesting percentage to a maximum of 100%). This severance
compensation shall be paid in ten (10) equal annual installments beginning on
the date of said termination.
A. Discharge for Cause:
Should a director be discharged for cause, all benefits under this Agreement
shall
be forfeited. The term "for cause" shall mean the conviction of a felony or
gross
misdemeanor involving fraud, dishonesty, or wilful violation of any law that
results in any adverse effect on the Bank. If a dispute arises as to discharge
"for
cause," such dispute shall be resolved by arbitration.
In the event the Director's death should occur after such severance but prior to
the
completion of the monthly payments provided for in this Paragraph VIII, the
remaining
installments shall be paid to such individual or individuals as the Director may
have
designated in writing and filed with the Bank. In the absence of any effective
designation of beneficiary, any such amounts shall be payable to the duly
qualified
executor or administrator of his estate.
IX. PARTICIPATION IN OTHER PLANS
The benefits provided hereunder shall be in addition to Director's annual
salary
as determined by the Board of Directors, and shall not affect the right of
Director
to participate in any current or future Bank Retirement Plan, group insurance,
bonus, or in any supplemental compensation arrangement which constitutes a
part of the Bank's regular compensation structure.
X. NON-COMPETE AND CHANGE OF CONTROL
The payment of benefits under this Agreement shall be continent upon the
Director's not
engaging in any activity that directly or indirectly competes with the Banks
interests,
within 25 miles of any office of the Bank existing at the time of Directors
retirement or
termination.
In the event there is a change in control of the ownership of the Bank, Director
shall
become 100% vested for the purposes of Paragraph VIII hereinabove. Change of
control
shall be deemed to be the cumulative transfer of more than twenty-five percent
(25%) of
the voting stock of the Bank from the Effective Date of this Agreement. For
the
purposes of this Agreement, transfers on account of deaths or gifts, transfers
between
family members or transfers to a qualified retirement plan maintained by the
Bank shall
not be considered in determining whether there has been a change in control.
XI. ALIENABILITY
It is agreed that neither Director, nor his/her spouse, nor any other assignee,
shall
have any right to commute, sell, assign, transfer or otherwise convey the right
to
receive any payments hereunder, which payments and the right thereto are
expressly declared to be non-assignable and non-transferable; and, in the event
of any attempted assignment or transfer, the Bank shall have no further
liability
hereunder.
3
XII. RESTRICTIONS ON FUNDING
The Bank shall have no obligation to set aside earmark, or entrust any fund or
money with which to pay
its obligations under this Agreement. The Bank reserves the absolute right at
its sole discretion to either
fund the obligations undertaken by this Agreement or to refrain from funding,
the same and determine the
extent, nature, and method of such funding.
XIII. GENERAL ASSETS OF THE BANK
The rights of the Director under this Agreement and of any beneficiary of the
Director shall be solely
those of an unsecured creditor of the Bank. If the Bank shall acquire an
insurance policy or any other
asset in connection with the liabilities assumed by it hereunder, it is
expressly understood and agreed that
neither Director nor any beneficiary of Director shall have any right with
respect to, or claim against,
such policy or other asset. Such policy or asset shall not be deemed to be held
under any trust for the
benefit of Director or his beneficiaries or to be held in any way as collateral
security for the fulfilling of
the obligations of the Bank under this Agreement. It shall be and remain, a
general, unpledged,
unrestricted asset of the Bank and Director or any of his beneficiaries shall
not have a greater claim to the
insurance policy or other assets, or any interest in either of them, than any
other general creditor of the
Bank.
XIV. REORGANIZATION
The Bank agrees that if the Bank merges or consolidates with any other company
or organization,
or permits its business activities to be taken over by any other organization,
or ceases its business
activities or terminates its existence. The Director will be considered to be
vested in one
hundred percent (100%) of the retirement benefit to be paid to the Director
pursuant to Paragraph
IV above.
XV. AMENDMENT
This Agreement may be amended in whole or in part from time to time by the
Employer, but only
in writing.
XVI. NOT A CONTRACT OF EMPLOYMENT
This Agreement shall not be deemed to constitute a contract of employment
between the parties
hereto, nor shall any provision hereof restrict the right of the Bank to
discharge the Director, or
restrict the right of the Director to terminate his employment.
XVII. HEADINGS
Headings and subheadings of this Agreement are inserted for reference and
convenience only and shall
not be deemed a part of this agreement.
XVIII. APPLICABLE LAW
The validity and interpretation of this Agreement shall be governed by the laws
of the State of
Pennsylvania.
XIX. EFFECTIVE DATE
The effective date of this agreement shall be March 3, 1998.
4
XX. CLAIMS PROCEDURE
In the event that benefits under this Agreement are not paid to the Director (or
his beneficiary in the case
of the Director's death), and such person feels entitled to receive them, a
claim shall be made in writing to
the Plan Administrator within ninety (90) days from the date payments are not
made. Such claim shall be
reviewed by the Plan Administrator and the Bank. If the claim is denied, in
full or in part, the Plan
Administrator shall provide a written notice within ninety (90) days setting
forth the specific reasons for
denial, specific reference to the provisions of this Agreement upon which the
denial is based, and any
additional material or information necessary to perfect the claim, if any.
Also, such written notice shall
indicate the steps to be taken if a review of the denial is desired.
If a claim is denied and a review is desired, the Director (or his beneficiary
in the case of the Director's
death), shall notify the Plan Administrator in writing within ninety (90) days
[and a claim shall be
deemed denied if the Plan Administrator does not take any action with the
aforesaid ninety (90) day
period]. In requesting a review, the Director or his beneficiary may review
this Agreement or any
documents relating to it and submit any written issues and comments he or she
may feel appropriate. In
its sole discretion the Plan Administrator shall then review the claim and
provide a written decision
within ninety (90) days. This decision likewise shall state the specific
provisions of the Agreement on
which the decision is based.
XXI. NAMED FIDUCIARY AND PLAN ADMINISTRATOR
For purposes of implementing this claims procedure (but not for any other
purpose), First
National Bank of McConnellsburg, is hereby designated as the Named Fiduciary and
Plan
Administrator of Plan Agreement. As Named Fiduciary and Plan Administrator,
First National
Bank of McConnellsburg shall be responsible for the management, control and
administration of
the agreement as established herein. The Named Fiduciary may delegate to
certain aspects of the
management a operation responsibilities of the Plan including the employment of
advisors and
the delegation of ministerial duties to qualified individuals.
IN WITNESS WHEREOF, the Bank has caused this Agreement to be signed in its
corporate name by its
duly authorized officer, and attested by its Secretary, and Director hereunto
set his hand and seal, all on the day
and year first above written.
FIRST NATIONAL BANK
OF MCCONNELLSBURG
By:
Secretary Title
Witness H. Lyle Duffey
5
<Independent AuditorOs Report><Board of Directors
FNB Financial Corporation
McConnellsburg, Pennsylvania
We have audited the accompanying consolidated balance sheets of FNB Financial
Corporation and its wholly-owned subsidiary as
of December 31, 1999 and 1998, and the related consolidated statements of
income, changes in stockholdersO equity, and cash flows
for each of the three years ended December 31, 1999. These consolidated
financial statements are the responsibility of the
CorporationOs management. Our responsibility is to express an opinion on these
consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of
FNB Financial Corporation and its wholly-owned subsidiary as of December 31,
1999 and 1998 and the results of their operations
and their cash flows for each of the three years ended December 31, 1999 in
conformity with generally accepted accounting
principles.><Chambersburg, Pennsylvania
February 15, 2000><#><Consolidated Balance Sheets><December 31, 1999 and 1998
1999 1998
____________ ____________
ASSETS
Cash and due from banks $ 3,565,173 $ 3,134,802
Interest-bearing deposits with banks 723,094 2,019,612
Investment securities:
Available-for-sale 28,085,248 32,887,516
Held-to-maturity (fair value $1,556,865 - 1999;
$2,429,959 - 1998) 1,669,712 2,449,621
Federal Reserve, Atlantic Central BankerOs
Bank and Federal Home Loan Bank stock 681,200 394,100
Federal funds sold 0 4,136,000
Loans, net of unearned discount and allowance
for loan losses 76,137,080 61,900,581
Bank building, equipment, furniture and fixtures, net 3,119,101 3,149,012
Accrued interest and dividends receivable 687,259 718,543
Deferred income taxes 676,502 16,989
Other real estate owned 165,603 370,511
Cash surrender value of life insurance 2,107,104 2,025,510
Other assets 312,107 362,597
____________ ____________
Total Assets $117,929,183 $113,565,394
____________ ____________
____________ ____________
LIABILITIES
Deposits:
Demand deposits $ 10,959,096 $ 10,819,419
Savings deposits 27,567,017 30,911,801
Time certificates 60,509,040 58,501,511
Other time deposits 294,783 271,204
____________ ____________
Total Deposits 99,329,936 100,503,935
Liability for borrowed funds 6,364,996 168,764
Accrued dividends payable 172,000 108,000
Accrued interest payable and other liabilities 861,514 868,129
____________ ____________
Total Liabilities 106,728,446 101,648,828
____________ ____________
STOCKHOLDERSO EQUITY
Capital stock, common, par value $.63; 6,000,000 shares authorized;
400,000 shares issued and outstanding 252,000 252,000
Additional paid-in capital 1,789,833 1,789,833
Retained earnings 10,125,145 9,621,863
Accumulated other comprehensive income ( 966,241) 252,870
____________ ____________
Total stockholdersO equity 11,200,737 11,916,566
____________ ____________
Total liabilities and stockholdersO equity $117,929,183 $113,5
65,394
____________ ____________
____________ ____________
><The Notes to Consolidated Financial Statements are an integral part of these
statements.><#><Consolidated Statements of
Income><Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
_________ _________ _________
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $5,766,741 $5,450,880 $ 5,271,134
Interest on investment securities:
EEEU.S. Treasury securities 1,585 12,522 35,785
EEEObligations of other U.S. Government agencies 1,366,191 1,405,213 1,421,
340
EEEObligations of states and political subdivisions 485,198 492,672
430
,194
Interest on deposits with banks 68,182 81,635 25,594
Dividends on equity securities 33,995 28,329 27,078
Interest on federal funds sold 80,297 249,941 176,766
_________ _________ _________
$7,802,189 $7,721,192 $7,387,891
INTEREST EXPENSE
Interest on borrowed funds 88,932 11,368 5,865
Interest on deposits 4,030,292 4,101,076 3,841,015
_________ _________ _________
EEENet interest income 3,682,965 3,608,748 3,541,011
Provision for loan losses 190,000 474,814 232,500
_________ _________ _________
EEENet interest income after provision
EEEEEfor loan losses $3,492,965 $3,133,934 $3,308,511
_________ _________ _________
OTHER INCOME
Service charges on deposit accounts 123,731 85,375 72,707
Other service charges, collection and exchange charges,
EEEcommissions and fees 260,990 228,450 193,464
Other income, net 186,085 72,820 45,536
Gain on sale of PHEAA loans 0 0 31,211
Securities gains 49,655 143,288 5,752
_________ _________ _________
$ 620,461 $ 529,933 $ 348,670
_________ _________ _________
OTHER EXPENSES
Salaries and wages 1,251,344 1,129,581 1,094,033
Pensions and other employee benefits 326,859 288,473 286,760
Net occupancy expense of bank premises 236,758 209,206 194,148
Furniture and equipment expenses 258,525 241,535 223,680
Other operating expenses 956,086 903,406 809,708
_________ _________ _________
$3,029,572 $2,772,201 $2,608,329
_________ _________ _________
EEEIncome before income taxes 1,083,854 891,666 1,048,852
Applicable income taxes 180,572 109,716 193,122
_________ _________ _________
EEENet income $ 903,282 $ 781,950 $ 855,730
_________ _________ _________
_________ _________ _________
Earnings per share of common stock:
EEENet income $ 2.26 $ 1.96 $ 2.14
_________ _________ _________
_________ _________ _________
EEEWeighted average shares outstanding 400,000 400,000 400,000><The
Notes
to Consolidated Financial Statements are an integral part of these statements.>
<#><Consolidated Statements of Changes
in StockholdersO Equity><Years Ended December 31, 1999, 1998 and 1997
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive StockholdersO
Stock Capital Earnings Income Equity
_________ __________ __________ _________ _________
BALANCE, DECEMBER 31, 1996 $252,000 $1,789,833 $ 8,628,183 $
32,016
$10,702,032
Comprehensive income:
Net income 0 0 855,730 0 855,730
Changes in unrealized gain on securities
EEavailable for sale, net of taxes of $78,296 0 0 0 151,987
151
,987
_________ __________ __________ _________ _________
Total comprehensive income 0 0 0 0 1,007,717
Cash dividends declared on common stock
EE($.80 per share) 0 0 ( 320,000) 0 ( 320,000)
_________ __________ __________ _________ _________
BALANCE, DECEMBER 31, 1997 $252,000 $1,789,833 $ 9,163,913 $184,0
03 $11,389,749
Comprehensive income:
Net income 0 0 781,950 0 781,950
Changes in unrealized gain on securities
EEavailable for sale, net of taxes of $35,477 0 0 0 68,867
68,8
67
_________ __________ __________ _________ _________
Total comprehensive income 0 0 0 0 850,817
Cash dividends declared on common stock
EE($.81 per share) 0 0 ( 324,000) 0 ( 324,000)
_________ __________ __________ _________ _________
BALANCE, DECEMBER 31, 1998 $252,000 $1,789,833 $ 9,621,863 $252,8
70 $11,916,566
Comprehensive income:
Net income 0 0 903,282 0 903,282
Changes in unrealized loss on securities
EEavailable for sale, net of taxes of $628,026 0 0 0 (1,219,111)
(1,219,111)
_________ __________ __________ _________ _________
Total comprehensive income 0 0 0 0 (315,828)
Cash dividends declared on common stock
EE($1.00 per share) 0 0 ( 400,000) 0 ( 400,000)
_________ __________ __________ _________ _________
BALANCE, DECEMBER 31, 1999 $252,000 $1,789,833 $10,125,145 $966,2
41 $11,200,737
_________ __________ __________ _________ _________
_________ __________ __________ _________ _________
><The Notes to Consolidated Financial Statements are an integral part of these
statements.><#><Consolidated Statements of Cash
Flows><Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
_________ _________ _________
Cash flows from operating activities:
Net income $ 903,282 $ 781,950 $ 855,730
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 278,402 269,418 251,405
Provision for loan losses 190,000 474,814 232,500
Deferred income taxes ( 31,487) ( 120,346) 3,868
Loss on sale of other real estate 12,281 9,904 3,000
Increase on cash surrender value of life insurance ( 81,594)
( 40,510) 0
(Gain) loss on sales/maturities of investments ( 49,655) (
143,288)
( 5,752)
(Gain) loss on disposal of equipment ( 554) 0 2,412
(Increase) decrease in accrued interest receivable 31,285 (
108,303) 64,940
Increase (decrease) in accrued
EEEEEEinterest payable and other liabilities ( 6,617) 129,932
30,
125
Other, net 14,124 17,511 17,066
__________ __________ __________
Net cash provided by operating activities $1,259,467 $1,271,082
$1,45
5,294
__________ __________ __________
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits with banks 1,296,518
4,030,934 ( 5,723,270)
Maturities of held-to-maturity securities 779,909 1,072,165 1,735,560
Purchases of held-to-maturity securities 0 ( 545,947) (
151,662)
Proceeds from sales of available-for-sale securities 1,151,501 3,746,590
1,278,472
Maturities of available-for-sale securities 4,145,757 6,135,245 10,341,312
Purchases of available-for-sale securities ( 2,292,472) (16,183,311)
( 8,851,118)
Proceeds from sales of other real estate owned 207,527 156,912 104,37
5
Net (increase) in loans (14,466,397) ( 3,371,383) ( 3,313,454)
Purchase of other bank stock ( 287,100) ( 4,500) (
11,780)
Purchases of bank premises and equipment, net ( 187,627) (
106,587)
( 424,173)
Purchase of life insurance 0 ( 1,985,000) 0
Proceeds from sale of equipment 1,054 0 0
__________ __________ __________
Net cash (used) by investing activities ($9,651,330) ($7,054,882)
($5
,015,738)
__________ __________ __________
Cash flows from financing activities:
Net increase in deposits ( 1,173,998) $ 7,244,245 $ 6,125,722
Cash dividends paid ( 336,000) ( 320,000) ( 316,000)
Net short-term borrowings 3,701,000 0 0
Proceeds from long-term borrowings 2,500,000 0 462,493
Principle payments on borrowings ( 4,768) ( 291,955) (
1,774)
__________ __________ __________
Net cash provided by financing activities $ 4,686,234 $ 6,632,290
$6,2
70,441
__________ __________ __________
Net increase (decrease) in cash and cash equivalents ($3,705,629) 848,49
0
2,709,997
Cash and cash equivalents, beginning balance 7,270,802 6,422,312 3,712,
315
__________ __________ __________
Cash and cash equivalents, ending balance $3,565,173 $7,270,802
$6,42
2,312
__________ __________ __________
__________ __________ __________
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest $4,118,343 $ 4,114,164 $ 3,818,501
Income taxes 226,385 159,550 155,987
Supplemental schedule of noncash investing
and financing activities:
Unrealized gain (loss) on securities
EEavailable-for-sale, net of income tax effect ($1,219,111) $
68,867
$ 151,987
Other real estate acquired in settlement of loans 59,900 100,000 216,87
1
Loan advanced for sale of other real estate owned 0 93,000 93,600
><The Notes to Consolidated Financial Statements are an integral part of these
statements.><#><Notes to Consolidated Financial
Statements><Note 1.ESignificant Accounting Policies
Nature of Operations
FNB Financial CorporationOs primary activity consists of owning and supervising
its subsidiary, The First National Bank of
McConnellsburg, which is engaged in providing banking and bank related services
in South Central Pennsylvania, and Northwestern
Maryland. Its five offices are located in McConnellsburg (2), Fort Loudon and
Needmore, Pennsylvania, and Hancock, Maryland.
Principles of Consolidation
The consolidated financial statements include the accounts of the corporation
and its wholly-owned subsidiary, The First National
Bank of McConnellsburg. All significant intercompany transactions and accounts
have been eliminated.
First Fulton County Community Development Corporation (FFCCDC) was formed as a
wholly-owned subsidiary of The First
National Bank of McConnellsburg. The purpose of FFCCDC is to serve the needs of
low-to-moderate income individuals and small
business in Fulton County under the Community Development and Regulatory
Improvement Act of 1995.
Basis of Accounting
The Corporation uses the accrual basis of accounting.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results
could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on
loans and the valuation of real estate acquired in connection with foreclosures
or in satisfaction of loans. In connection with the
determination of the allowances for losses on loans and foreclosed real estate,
management obtains independent appraisals for
significant properties.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the
allowances may be necessary based on changes in local economic conditions. In
addition, regulatory agencies, as an integral part of
their examination process, periodically review the CorporationOs allowance for
losses on loans and foreclosed real estate. Such
agencies may require the corporation to recognize additions to the allowances
based on their judgments about information available
to them at the time of their examination. Because of these factors,
managementOs estimate of credit losses inherent in the loan
portfolio and the related allowance may change in the near term.
Cash Flows
For purposes of the statements of cash flows, the Corporation has defined cash
and cash equivalents as those amounts included in the
balance sheet captions OCash and Due From BanksO and OFederal Funds Sold.O As
permitted by Statement of Financial
Accounting Standards No. 104, the Corporation has elected to present the net
increase or decrease in deposits in banks, loans and
deposits in the Statements of Cash Flows.
Investment Securities
In accordance with Statement of Financial Accounting Standards Number 115 (SFAS
115) the CorporationOs investments in
securities are classified in three categories and accounted for as follows:
Trading Securities. Securities held principally for resale in the near term are
classified as trading securities and recorded at their
fair values. Unrealized gains and losses on trading securities are included in
other income.
Securities to be Held-to-Maturity. Bonds and notes for which the Corporation
has the positive intent and ability to hold to maturity
are reported at cost, adjusted for amortization of premiums and accretion of
discounts which are recognized in interest income using
the interest method over the period to maturity.
Securities Available-for-Sale. Securities available-for-sale consist of equity
securities, bonds and notes not classified as trading
securities nor as securities to be held-to-maturity. These are securities that
management intends to use as a part of its asset and
liability management strategy and may be sold in response to changes in interest
rates, resultant prepayment risk and other related
factors. Unrealized holding gains and losses, net of tax, on securities
available for sale are reported as a net amount in other
comprehensive income until realized. Gains and losses on the sale of securities
available for sale are determined using the specific-
identification method.
Fair values for investment securities are based on quoted market prices.
The Corporation had no trading securities in 1999 or 1998.
Federal Reserve Bank, Atlantic Central BankerOs Bank, and Federal Home Loan Bank
Stock
These investments are carried at cost. The Corporation is required to maintain
minimum investment balances in these stocks, which
are not actively traded and therefore have no readily determinable market value.
Other Real Estate Owned
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at the lower of
carrying value or fair value of the underlying collateral less cost to sell.
After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of carrying amount or
fair value less cost to sell. Legal fees and other costs
related to foreclosure proceedings are expensed as they are incurred.
Loans and Allowance for Possible Loan Losses
Loans are stated at the amount of unpaid principal, reduced by unearned
discount, deferred loan origination fees, and an allowance
for loan losses. Unearned discount on installment loans is recognized as income
over the terms of the loans by the interest method.
Interest on other loans is calculated by using the simple interest method on
daily balances of the principal amount outstanding.
Amortization of premiums and accretion of discounts on acquired loans are
recognized in interest income using the interest method
over the period to maturity. The allowance for loan losses is established
through a provision for loan losses charged to expense.
Loans are charged against the allowance for loan losses when management believes
that the collectibility of the principal is unlikely.
The allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans and prior
loan loss experience. The evaluations take into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the borrowersO
ability to pay.
In accordance with SFAS No. 91, loan origination fees and certain direct loan
origination costs are being deferred and the net
amount amortized as an adjustment of the related loanOs yield. The Corporation
is amortizing these amounts over the contractual
life of the related loans. Deferred loan origination fees were $215,670 and
$219,185 at December 31, 1999 and 1998, respectively.
Deferred loan costs were $113,885 and $109,163 at December 31, 1999 and 1998,
respectively.
Nonaccrual/Impaired Loans
The accrual of interest income on loans ceases when principal or interest is
past due 90 days or more and collateral is inadequate to
cover principal and interest or immediately if, in the opinion of management,
full collection is unlikely. Interest accrued but not
collected as of the date of placement on nonaccrual status is reversed and
charged against current income unless fully collateralized.
Subsequent payments received either are applied to the outstanding principal
balance or recorded as interest income, depending on
managementOs assessment of the ultimate collectibility of principal. Interest
income generally is not recognized on specific
impaired loans unless the likelihood of further loss is remote. Interest
payments received on such loans are applied as a reduction of
the loan principal balance. Interest income on other impaired loans is
recognized only to the extent of interest payments received.
Bank Building, Equipment, Furniture and Fixtures and Depreciation
Bank building, equipment, furniture and fixtures are carried at cost less
accumulated depreciation. Expenditures for replacements
are capitalized and the replaced items are retired. Maintenance and repairs are
charged to operations as incurred. Depreciation is
computed based on straight-line and accelerated methods over the estimated
useful lives of the related assets as follows:
Earnings Per Share
Earnings per common share were computed based upon weighted average shares of
common stock outstanding of 400,000 for 1999,
1998 and 1997.
Intangibles
Intangible costs are amortized on a straight-line basis over fifteen years.
Federal Income Taxes
As a result of certain timing differences between financial statement and
federal income tax reporting, deferred income taxes are
provided in the financial statements. See Note 7 for further details.
Advertising
The corporation follows the policy of charging costs of advertising to expense
as incurred. Advertising expense was $ 63,268, $
84,311, and $ 69,675 for 1999, 1998 and 1997, respectively.
Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments, requires disclosure of
fair value information about financial instruments, whether or not recognized in
the balance sheet. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized
in immediate settlement of the instruments. Statement No. 107 excludes certain
financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the
underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in estimating
fair values of financial instruments as disclosed
herein:
Cash and Short-Term Instruments. The carrying amounts of cash and short-term
instruments approximate their fair value.
Securities to be Held-to-Maturity and Securities Available-for-Sale. Fair
values for investment securities are based on quoted
market prices.
Loans Receivable. For variable-rate loans that reprice frequently and have no
significant change in credit risk, fair values are
based on carrying values. Fair values for fixed rate loans are estimated using
discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality. Fair values for impaired loans are
estimated using discounted cash flow analyses or underlying collateral values,
where applicable.
Deposit Liabilities. The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the
reporting date (that is, their carrying amounts). The carrying amounts of
variable-rate certificates of deposit, and fixed-term money
market accounts approximate their fair values at the reporting date. Fair
values for fixed-rate certificates of deposit and IRAOs are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered to a schedule of aggregated
expected monthly maturities on time deposits.
Accrued Interest. The carrying amounts of accrued interest approximate their
fair values.
Off-Balance-Sheet Instruments. The Bank generally does not charge commitment
fees. Fees for standby letters of credit and other
off-balance-sheet instruments are not significant.
Comprehensive Income
In 1998 the Corporation adopted Statement of Financial Accounting Standards
(SFAS) No. 130 D Reporting Comprehensive
Income. Under SFAS No. 130, comprehensive income is defined as the change in
equity from transactions and other events from
nonowner sources. It includes all changes in equity except those resulting from
investments by stockholders and distributions to
stockholders. Comprehensive income includes net income and certain elements of
Oother comprehensive incomeO such as foreign
currency transactions; accounting for futures contracts; employers accounting
for pensions; and accounting for certain investments in
debt and equity securities.
The Corporation has elected to report its comprehensive income in the statement
of stockholdersO equity. The only element of
Oother comprehensive incomeO that the Corporation has is the unrealized gain or
loss on available for sale securities. The 1997
financial statements have been reclassified to reflect these changes in
reporting format.
The components of the change in net unrealized gains (losses) on securities were
as follows:
Note 2.EInvestment Securities
The amortized cost and fair values of investment securities available for sale
at December 31 were:
The amortized cost and fair values of investment securities held-to-maturity at
December 31 were:
The amortized cost and fair values of investment securities available for sale
and held-to-maturity at December 31, 1999 by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the
right to call or repay obligations with or without call or repayment penalties.
Proceeds from sales of investment securities available-for-sale during 1999 were
$1,151,501. Gross losses on these sales were
$4,101 and gross gains were $53,756. Related taxes were $16,883.
Proceeds from sales of investment securities available-for-sale during 1998 were
$3,746,590. Gross losses on these sales were
$3,441 and gross gains were $146,729. Related taxes were $48,718.
Proceeds from sales of investment securities available-for-sale during 1997 were
$1,278,472. Gross losses on these sales were
$10,395 and gross gains were $13,728. Related taxes were $1,133.
There were no sales of investment securities held-to-maturity in 1999, 1998 or
1997.
Investment securities carried at $9,910,025 and $5,785,222 at December 31, 1999
and 1998, respectively, were pledged to secure
public funds and for other purposes as required or permitted by law.
Note 3.ELoans
Loans consist of the following at December 31:
The following table shows maturities and sensitivities of loans to changes in
interest rates based upon contractual maturities and
terms as of December 31, 1999.
The Bank has granted loans to the officers and directors of the corporation and
to their associates. Related party loans are made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with
unrelated persons and do not involve more than normal risk of collectibility.
The aggregate dollar amount of these loans was
$2,370,934 and $2,247,582 at December 31, 1999 and 1998, respectively. During
1999, $1,814,319 of new loans were made and
repayments totaled $1,690,967. During 1998, $2,412,075 of new loans were made
and repayments totaled $3,441,184.
Outstanding loans to Bank employees totaled $1,279,747 and $1,186,068 for years
ended December 31, 1999 and 1998,
respectively.
Note 4.EAllowance for Loan Losses
Activity in the allowance for loan losses is summarized as follows:
A breakdown of the allowance for loan losses as of December 31 is as follows:
There were no impaired loans in 1999 or 1998.
Impairment of loans having a recorded investment of $112,000 at December 31,
1997 was recognized in conformity with SFAS No.
114 as amended by SFAS No. 118. The average recorded investment in impaired
loans during 1997 was $174,236. The total
allowance for loan losses related to these loans was $100,000 at December 31,
1997. Interest income on impaired loans of $3,318
was recognized for cash payments received in 1997.
Note 5.ENonaccrual, Past Due and Restructured Loans
The following table shows the principal balances of nonaccrual loans as of
December 31:
Loans 90 days or more past due (still accruing interest) were as follows at
December 31:
Note 6.EBank Building, Equipment, Furniture and Fixtures
Bank building, equipment, furniture and fixtures consisted of the following at
December 31:
Depreciation expense amounted to $262,036 in 1999, $253,052 in 1998, and
$234,643 in 1997.
Note 7.EIncome Taxes
The components of federal income tax expense are summarized as follows:
Federal income taxes were computed after adjusting pretax accounting income for
nontaxable income in the amount of $620,660,
$571,240, and $522,040 for 1999, 1998 and 1997, respectively.
A reconciliation of the effective applicable income tax rate to the federal
statutory rate is as follows:
Deferred income taxes at December 31 are as follows:
The tax effects of each type of significant item that gives rise to deferred
taxes are:
The corporation has not recorded a valuation allowance for the deferred tax
assets as management feels that it is more likely than not
that they will be ultimately realized.
Note 8.EEmployee Benefit Plans
The corporation has a 401-K plan which covers all employees who have attained
the age of 20 and who have completed six months
of full-time service. The plan provides for the corporation to match employee
contributions to a maximum of 5% of annual
compensation. The corporation also has the option to make additional
discretionary contributions to the plan based upon the
corporationOs performance and subject to approval by the Board of Directors.
The corporationOs total expense for this plan was
$84,909, $72,887, and $76,754 for the years ended December 31, 1999, 1998 and
1997, respectively.
During 1998 the corporation adopted three new supplemental retirement benefit
plans for directors and executive officers. These
plans are funded with single premium life insurance on the plan participants.
The cash value of the life insurance policies is an
unrestricted asset of the corporation. The estimated present value of future
benefits to be paid totaled $82,428 and $27,240 at
December 31, 1999 and 1998, respectively, which is included in other
liabilities. Total annual expense for these plans amounted to
$64,339 and $27,240 for 1999 and 1998, respectively.
Note 9.EDeposits
Included in savings deposits are NOW and Super NOW account balances totaling
$6,253,110 and $7,916,530 at December 31, 1999
and 1998, respectively. Also included in savings deposits at December 31, 1999
and 1998 are Money Market account balances
totaling $7,737,456 and $10,103,386, respectively.
Time certificates of $100,000 and over as of December 31 were as follows:
Interest expense on time deposits of $100,000 and over aggregated $688,565,
$627,740 and $551,875 for 1999, 1998 and 1997,
respectively.
At December 31, 1999 the scheduled maturities of certificates of deposit are as
follows (000 omitted):
The corporation accepts deposits of the officers, directors and employees of the
corporation and its subsidiary on the same terms,
including interest rates, as those prevailing at the time for comparable
transactions with unrelated persons. The aggregate dollar
amount of deposits of officers, directors and employees totaled $6,658,077 and
$9,247,049 at December 31, 1999 and 1998,
respectively.
The aggregate amount of demand deposit overdrafts reclassified as loan balances
were $177,149 and $7,231 at December 31, 1999
and 1998, respectively.
Note 10.EFinancial Instruments With Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financial needs
of its customers and to reduce its own exposure to fluctuations in interest
rates. These financial instruments include commitments to
extend credit and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the balance sheets. The contract amounts of
those instruments reflect the extent of involvement
the Bank has in particular classes of financial instruments.
The corporationOs exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for
commitments to extend credit and standby letters of credit is represented by the
contractual amount of those instruments. The
corporation uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet
instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily
represent future cash requirements. The corporation evaluates each customerOs
credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the corporation upon
extension of credit, is based on managementOs credit
evaluation of the customer. Collateral held varies but may include accounts
receivable, inventory, real estate, equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the corporation
to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public and private
borrowing arrangements. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loans to customers. The corporation holds collateral
supporting those commitments when deemed necessary by management.
Note 11.EConcentration of Credit Risk
The corporation grants agribusiness, commercial and residential loans to
customers located in South Central Pennsylvania and
Northwestern Maryland. Although the corporation has a diversified loan
portfolio, a portion of its customersO ability to honor their
contracts is dependent upon the construction and land development and
agribusiness economic sectors.
The corporation evaluates each customerOs credit worthiness on a case-by-case
basis. The amount of collateral obtained if deemed
necessary by the corporation upon the extension of credit is based on
managementOs credit evaluation of the customer. Collateral
held varies but generally includes equipment and real estate.
The corporation maintains deposit balances at correspondent banks, which provide
check collection and item processing services to
the corporation. The balances with these correspondent banks, at times, exceed
federally insured limits, which management
considers to be a normal business risk.
Note 12. FNB Financial Corporation (Parent Company Only) Financial Information
The following are the condensed balance sheets, statements of income and
statements of cash flows for the parent company.
Note 13.ERegulatory Matters
Dividends paid by FNB Financial Corporation are generally provided from the
dividends it receives from the Bank. The Bank, as a
National Bank, is subject to the dividend restrictions set forth by the
Comptroller of the Currency. Under such restrictions, the Bank
may not, without prior approval of the Comptroller of the Currency, declare
dividends in excess of the sum of the current yearOs
earnings (as defined) plus the retained earnings (as defined) from the prior two
years. The dividends that the Bank could declare
without the approval of the Comptroller of the Currency amounted to
approximately $2,266,858 and $2,672,579 at December 31,
1999 and 1998, respectively.
FNB Financial CorporationOs balance of retained earnings at December 31, 1999 is
$10,125,145 and would be available for cash
dividends, although payment of dividends to such extent would not be prudent or
likely. The Federal Reserve Board, which
regulates bank holding companies, establishes guidelines which indicate that
cash dividends should be covered by current period
earnings.
The Bank is also subject to various regulatory capital requirements administered
by federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the BankOs financial
statements. Under capital adequacy guidelines, the Bank is
required to maintain minimum capital ratios. The Oleverage ratioO compares
capital to adjusted total balance sheet assets. OTier
IO and OTier IIO capital ratios compare capital to risk-weighted assets and off-
balance sheet activity. A comparison of the
CorporationOs capital ratios to regulatory minimums at December 31 is as
follows:
As of December 31, 1999 the most recent regulatory exam from the Office of the
Comptroller of the Currency categorized the Bank
as well capitalized under the regulatory frame work for prompt corrective
action. There are no conditions or events since that
notification that management believes have changed the BankOs category.
Note 14.ECompensating Balance Arrangements
Required deposit balances at the Federal Reserve were $125,000 for 1999 and
1998. Required deposit balances at Atlantic Central
BankerOs Bank were $470,000 and $528,000 at December 31, 1999 and 1998
, respectively. These balances are maintained to cover
processing costs and service charges.
Note 15.EFair Value of Financial Instruments
The estimated fair values of the CorporationOs financial instruments were as
follows at December 31:
Note 16.ELiability for Borrowed Funds
The Bank received Community Investment Program funding from the Federal Home
Loan Bank of Pittsburgh for $175,000 at a
fixed rate of 6.64% and an amortization term of 20 years. Required payments on
this loan are as follows:
The Bank had available a line of credit totaling $3,240,000 at December 31, 1998
with the Federal Home Loan Bank of Pittsburgh.
There were no outstanding balances against this line at December 31, 1998.
The Bank has two loans which carry a 4.27% fixed rate with issue dates of
December 30, 1999 and December 31, 1999 and maturity
dates of January 6, 2000 and January 7, 2000, respectively. These loans are held
by Federal Home Loan Bank of Pittsburgh. The
balance on these loans totaled $2,500,000 at December 31, 1999.
On December 17, 1999, the Bank borrowed on a convertible five year/three month
borrowing arrangement with Federal Home Loan
Bank of Pittsburgh. The current rate is 5.6% subject to the first adjustment
date of March 17, 2000 with final maturity of December
17, 2004. The balance was $2,500,000 at December 31, 1999.
The Bank also secured a line of credit with Federal Home Loan Bank of Pittsburgh
for $17,750,000 on July 15, 1999. The
outstanding balance at December 31, 1999 was $1,201,000 at a variable rate of
4.05% scheduled to mature November 29, 2000.
The total maximum borrowing capacity of the Bank from the FHLB Home Loan Bank at
December 31, 1999 was $38,474,000.
Collateral for borrowings at the Federal Home Loan Bank of Pittsburgh consists
of various securities and the CorporationOs 1-4
family mortgages with a total value of approximately $37,683,000.
The following represents a summary of the liability for borrowed funds at
December 31:
Note 17.EOperating Lease
The Corporation leases its Hancock, Maryland office. The original lease
term is
ten years with three separate successive options to
extend the lease for a term of five years each. Monthly rent is $1,800 and the
lessee pays a proportionate share of other operating
expenses. For the years ended December 31, 1999, 1998 and 1997 rent expense
under this operating lease was $ 21,600 for each
year. Required lease payments for the next five years are as follows:><#><Notes
to Consolidated Financial Statements><Years
Bank building 5-40
Equipment, furniture and fixtures 3-20
Land improvements 10-20
Leasehold improvements 7-20><#><Notes to Consolidated Financial Statements><
1999 1998 1997
Gross unrealized holding gains
arising during the year ($1,797,482) $247,632 $236,035
Reclassification adjustment for
(gains)/losses realized in net income ( 49,655) ( 143,288) (
5,752)
________ ________ ________
Net unrealized holding gains (losses)
before taxes 1,847,137 104,344 230,283
Tax effect ( 628,026 ( 35,477) ( 78,296)
________ ________ ________
Net change $1,219,111 $ 68,867 $151,987
________ ________ ________
________ ________ ________>< Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
_________ _________ _________ _________
1999
Obligations of other U.S.
Government agencies $17,836,357 $ 0 ($ 919,059)
$
16,917,298
Obligations of states and
political subdivisions 9,358,341 2,720 ( 508,099) 8,852,962
Mortgage-backed securities 1,066,353 4,880 ( 31,973) 1,039,
260
SBA loan pool certificates 1,078,051 2,889 ( 4,324)
1,076,616
Equities in local bank stock 210,148 10,000 ( 21,036)
199,112
__________ _________ _________ __________
Totals $29,549,250 $ 20,489 ($1,484,491) $28,085,248
__________ _________ _________ __________
__________ _________ _________ __________><#><Notes to Consolidated
Financial Statements>< Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
_________ _________ _________ _________
1998
U.S. Treasury securities $ 99,884 $ 491 $ 0 $
100,375
Obligations of other U.S.
Government agencies 19,110,380 214,360 ( 14,584)
19,31
0,156
Obligations of states and
political subdivisions 10,604,671 153,398 ( 19,499)
10,73
8,570
Mortgage-backed securities 1,085,728 13,695 ( 5,315)
1,09
4,108
SBA loan pool certificates 1,430,172 9,287 ( 3,440)
1,436,019
Equities in local bank stock 173,546 40,693 ( 5,951)
208,288
__________ _________ _________ __________
Totals $32,504,381 $ 431,924 ($ 48,789) $32,887,516
__________ _________ _________ __________
__________ _________ _________ __________>< Gross
Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
_________ _________ _________ _________
1999
SBA loan pool certificates $ 829,394 $ 2,283 ($ 9,079) $
822,598
Obligations of other U.S.
Government agencies 490,258 0 ( 105,988) 384,270
Obligations of states and
political subdivisions 350,060 237 ( 300) 349,997
_________ ________ _________ _________
Totals $1,669,712 $ 2,520 ($115,367) $1,556,865
_________ ________ _________ _________
_________ ________ _________ _________
1998
SBA loan pool certificates $1,212,406 $ 2,360 ($ 11,850) $
1,202,916
Obligations of other U.S.
Government agencies 457,080 0 ( 20,545) 436,535
Obligations of states and
political subdivisions 780,135 10,373 0 790,508
_________ ________ _________ _________
Totals $2,449,621 $12,733 ( $32,395) $2,429,959
_________ ________ _________ _________
_________ ________ _________ _________>< 1999 1998
_______ _______
(000 omitted)
Real estate loans:
EEEConstruction and land development $ 22 $ 256
EEESecured by farmland 3,866 4,434
EEESecured by 1-4 family residential
EEEEEEproperties 40,183 34,065
EEESecured by multi-family residential
EEEEEEproperties 642 342
EEESecured by nonfarmland nonresidential
EEEEEEproperties 7,407 4,853
Loans to farmers (except loans secured
EEEEEEprimarily by real estate) 5,455 2,916
Commercial, industrial and state and
EEEpolitical subdivision loans 7,843 5,427
Loans to individuals for household, family,
EEEor other personal expenditures 11,423 9,949
All other loans 1,391 1,846
_______ _______
EEEEEETotal loans 78,232 64,088
Less: Unearned discount on loans 1,349 1,455
EEEE Allowance for loan losses 746 732
_______ _______
EEEE Net Loans $76,137 $61,901
_______ _______
_______ _______>< Securities Available-
for-Sale
Amortized Fair
Cost Value
Due in one year or less $ 1,055,571 $ 1,052,545
Due after one year but less than five years 5,935,862 5,793,239
Due after five years but less than ten years 14,134,485 13,372,283
Due after ten years 6,068,780 5,552,193
__________ __________
27,194,698 25,770,260
Mortgage-backed securities 1,066,353 1,039,260
SBA loan pool certificates 1,078,051 1,076,616
Equities in local bank stock 210,148 199,112
__________ __________
Totals $29,549,250 $28,085,248
__________ __________
__________ __________
Securities Held-to-Maturity
Amortized Fair
Cost Value
Due in one year or less $ 350,060 $ 349,997
Due after one year but less than five years 0 0
Due after five years but less than ten years 0 0
Due after ten years 490,258 384,270
__________ __________
840,318 734,267
Mortgage-backed securities 0 0
SBA loan pool certificates 829,394 822,598
Equities in local bank stock 0 0
__________ __________
Totals $ 1,669,712 $ 1,556,865
__________ __________
__________ __________><#><Notes to Consolidated
Financial Statements>< Due Over
Due 1 But Due Non-
Within Within Over accruing
1 Year 5 Years 5 Years Loans Total
______ ______ ______ ______ ______
(000 omitted)
Loans at predetermined
EEEinterest rates $1,434 $13,635 $31,145 $ 52 $ 46,266
Loans at floating or
EEEadjustable interest rates 6,062 2,775 22,758 371
31,966
______ ______ ______ ______ ______
Total (1) $7,496 $16,410 $53,903 $ 423 $78,232
______ ______ ______ ______ ______
______ ______ ______ ______ ______
(1) These amounts have not been reduced by the allowance for possible loan
losses or unearned discount.>< 1999 1998
Percent Percent
of Loans of Loans
Allowance in Each Allowance in Each
(000 omitted) Amount Category Amount Category
_________ _________ _________ _________
Commercial, industrial
EEEand agriculture loans $295 28.04% $435 26.03%
1-4 family residential
EEEmortgages 222 42.32% 45 44.19%
Consumer and
EEEinstallment loans 34 12.03% 150 12.90%
Off-balance-sheet
EEEcommitments 110 17.61% 95 16.88%
Unsegregated 52 N/A 7 N/A
_________ _________ _________ _________
EEEEEETotal $746 100.0% $732 100.0%
_________ _________ _________ _________
_________ _________ _________ _________>< 1999 1998 1997
(000 omitted)
Allowance for loan losses,
EEEbeginning of the year $732 $426 $405
Loans charged-off during the year:
EEEReal estate mortgages 100 25 23
EEEInstallment loans 40 89 70
EEECommercial and all other loans 61 89 134
______ ______ ______
EEEEEETotal charge-offs 201 203 227
Recoveries of loans previously charged-off:
EEEReal estate mortgages 0 0 4
EEEInstallment loans 24 33 8
EEECommercial and all other loans 1 1 3
______ ______ ______
EEEEEETotal recoveries 25 34 15
Net loans charged-off (recovered) 176 169 212
Provision for loan losses charged
EEEto operations 190 475 233
______ ______ ______
Allowance for loan losses, end of the year $746 $732 $426
______ ______ ______
______ ______ ______>< 1999 1998 1997
Nonaccrual loans $422,820 $59,204 $414,009
_________ _________ _________
_________ _________ _________
Interest income that would have been
EEEaccrued at original contract rates $ 39,444 $ 5,559 $37,490
Amount recognized as
EEEinterest income 16,181 4,307 18,192
_________ _________ _________
EEEEEEForegone revenue $ 23,263 $ 1,252 $ 19,298
_________ _________ _________
_________ _________ _________>< 1999 1998 1997
(000 omitted)
Real estate mortgages $ 55 $ 166 $ 0
Installment loans 111 5 24
Demand and time loans 0 0 2
________ ________ ________
EEETotal $166 $171 $26
________ ________ ________
________ ________ ________><#><Notes
to Consolidated Financial Statements>< Accumulated Depreciated
Description Cost Depreciation Cost
1999
Bank building (including land $231,635) $ 3,267,970 $ 895,150
$
2,372,820
Equipment, furniture and fixtures 2,091,026 1,485,118 605,908
Land improvements 238,503 138,489 100,014
Leasehold improvements 49,219 8,860 40,359
_________ _________ _________
$5,646,718 $2,527,617 $3,119,101
_________ _________ _________
_________ _________ _________
1998
Bank building (including land $211,635) $ 3,141,361 $ 812,413
$
2,328,948
Equipment, furniture and fixtures 1,990,249 1,325,598 664,651
Land improvements 238,503 125,890 112,613
Leasehold improvements 48,819 6,019 42,800
_________ _________ _________
$5,418,932 $2,269,920 $3,149,012
_________ _________ _________
_________ _________ _________><
1999 1998
Net unrealized (gains) losses on
securities available-for-sale $497,761 ($130,266)
Depreciation expense ( 41,437) ( 49,255)
Retirement benefit reserve 28,026 9,262
Allowance for loan losses 192,152 187,248
_______ ______
EEEEEEEEE $676,502 $ 16,989
_______ ______
_______ ______><
1999 1998 1997
Current year provision $ 212,058 $230,062 $196,991
Deferred income taxes resulting from:
EEEDifferences between financial statement
EEEEEEand tax depreciation charges ( 7,817) ( 7,102) 3,000
EEEDifferences between financial statement
EEEEEEand tax loan loss provision ( 4,904) ( 103,982) ( 6,869)
EEEDifferences between financial statement
EEEEEand tax retirement benefit expense ( 18,765) ( 9,262)
0
E ________ ________ ________
EEEEEEEEEApplicable income tax $180,572 $109,716 $193,122
________ ________ ________
________ ________ ________><
1999 1998 1997
Federal income tax rate 34.0% 34.0% 34.0%
Reduction resulting from:
EEENontaxable interest income 17.3 21.7 15.6%
______ ______ ______
EEEEEEEEEEffective income tax rate 16.7% 12.3% 18.4%
______ ______ ______
______ ______ ______><
1999 1998
Deferred tax assets $717,939 $147,255
Deferred tax liabilities ( 41,437) ( 130,266)
_______ ______
EEEEEEEEE $676,502 $ 16,989
_______ ______
_______ ______><
1999 1998
(000 omitted)
Three months or less $ 1,132 $ 1,438
Three months to six months 1,641 236
Six months to twelve months 903 1,409
Over twelve months 8,616 8,148
_______ _______
EEETotal $12,292 $11,231
_______ _______
_______ _______><#><Notes to Consolidated
Financial Statements><2000 $ 25,904
2001 15,381
2002 9,481
2003 5,988
2004 3,746
Thereafter 9
________
$60,509
________
________
>< Contractor
Notional Amount
(000 omitted)
1999 1998
Financial instruments whose contract amounts
EEErepresent credit risk at December 31:
EEEEEECommitments to extend credit $15,296 $11,661
EEEEEECommercial and standby letters
EEEEEEEof credit 1,425 1,356
_______ _______
$16,721 $13,017
_______ _______
_______ _______
><#><Notes to Consolidated Financial Statements><BALANCE SHEETS
December 31
1999 1998
ASSETS
Cash $26,460 $ 5,286
Interest-bearing deposits with banks 6,917 11,961
Marketable equity securities
available-for-sale 199,112 208,288
Investment in The First National Bank
EEEof McConnellsburg 11,148,902 11,817,398
Other assets 6,252 2,945
__________ __________
EEETotal Assets $11,387,643 $12,045,878
__________ __________
__________ __________
LIABILITIES AND STOCKHOLDERSO EQUITY
Dividends payable $ 172,000 $ 108,000
Other liabilities 14,906 21,312
__________ __________
EEETotal Liabilities $ 186,906 $ 129,312
Common stock, par value $.63; 6,000,000
EEEshares authorized; 400,000 shares issued
EEEand outstanding 252,000 252,000
Additional paid-in capital 1,789,833 1,789,833
Retained earnings 10,125,145 9,621,863
Accumulated other comprehensive income ( 966,241) 252,870
__________ __________
EETotal Liabilities and
EEEStockholdersO Equity $11,387,643 $12,045,878
__________ __________
__________ __________
><STATEMENTS OF INCOME
Years Ended December 31
1999 1998 1997
Cash dividends from wholly-owned
EEEsubsidiary $364,000 $327,000 $ 240,000
Interest on deposits with banks 451 327 0
Dividend income D Marketable
equity securities 4,780 3,387 3,153
Securities gains 39,800 49,000 0
Equity in undistributed income
EEEof subsidiary 520,400 420,069 621,935
________ _________ ________
929,431 799,783 865,088
Less: Holding company expenses 18,378 12,927 9,358
________ _________ ________
EEEIncome before income taxes 911,053 786,856 855,730
Applicable income taxes 7,771 4,906 0
________ _________ ________
EEENet income $903,282 $781,950 $855,730
________ _________ ________
________ _________ ________
><STATEMENTS OF CASH FLOWS
Years Ended December 31
1999 1998 1997
Cash flows from operating activities:
EEENet income $903,282 $781,950 $855,730
EEEAdjustments to reconcile net
EEEEEEincome to cash provided by
EEEEEEoperating activities:
EEEEEEEEEEquity in undistributed
EEEEEEEEEEEEincome of subsidiary ( 520,400) ( 420,069) ( 621,935)
EEEEEEEEE(Gain) on sales of
EEEEEEEEEEEEinvestments ( 39,800) ( 49,000) 0
EEEEEEEEE(Increase) decrease in
EEEEEEEEEEEEother assets 445 235 ( 66)
EIncrease (decrease) in
EEEEEEEEEEEEother liabilities 5,405 9,118 ( 1,070)
________ ________ ________
Net cash provided (used) by
EEEoperating activities 348,932 322,234 232,659
________ ________ ________
Cash flows from investing activities:
EEENet (increase) in interest-bearing
EEEEEE deposits with banks 5,044 ( 11,961) 0
EEEPurchase of marketable equity
securities available-for-sale ( 71,002) ( 139,146)
(
5,880)
EEESales of marketable equity securities
EEEEEEEavailable-for-sale 74,200 105,000 0
________ ________ ________
Net cash provided (used) by
EEEEEEEinvesting activities 8,242 ( 46,107) (5,880)
________ ________ ________
Cash flows from financing activities:
EEECash dividends paid ( 336,000) ( 320,000) ( 316,000)
________ ________ ________
Net increase (decrease) in cash 21,174 ( 43,873) ( 89,221)
Cash, beginning balance 5,286 49,159 138,380
________ ________ ________
Cash, ending balance $ 26,460 $ 5,286 $ 49,159
________ ________ ________
________ ________ ________
>< FNB Financial Corporation Regulatory Minimum
1999 1998 Requirements
Leverage ratio 9.36% 10.34% 4%
Risk-based capital ratios/
Tier I (core capital) 15.39% 17.12% 4%
Combined Tier I and
Tier II (core capital
plus allowance for
loan losses) 16.43% 18.21% 8%><#><Notes to
Consolidated Financial Statements>< 1999
Carrying Amount Fair Value
FINANCIAL ASSETS
Cash and due from banks $ 3,565,173 $ 3,565,173
Interest-bearing deposits in banks 723,094 723,094
Federal funds sold 0 0
Securities available-for-sale 28,085,248 28,085,248
Securities to be held-to-maturity 1,669,712 1,556,865
Other bank stock 681,200 681,200
Loans receivable 76,137,080 75,406,951
Accrued interest receivable 678,259 687,259
FINANCIAL LIABILITIES
Time certificates 60,509,040 61,286,056
Other deposits 38,820,896 38,820,896
Accrued interest payable 582,198 582,198
Liability for borrowed funds 6,364,996 6,358,080
1998
Carrying Amount Fair Value
FINANCIAL ASSETS
Cash and due from banks $ 3,134,802 $ 3,134,802
Interest-bearing deposits in banks 2,019,612 2,019,612
Federal funds sold 4,136,000 4,136,000
Securities available-for-sale 32,887,516 32,887,516
Securities to be held-to-maturity 2,449,621 2,429,959
Other bank stock 394,100 394,100
Loans receivable 61,900,581 61,404,282
Accrued interest receivable 718,543 718,543
FINANCIAL LIABILITIES
Time certificates 58,501,511 59,743,872
Other deposits 42,002,424 42,002,424
Accrued interest payable 589,664 589,664
Liability for borrowed funds 168,764 179,576><
1999 1998
FHLB CIP Loan $ 163,996 $ 168,764
Repurchase Agreement 2,500,000 0
Convertible Loan Arrangement 2,500,000 0
Line of Credit 1,201,000 0
_________ _________
EEEEEEEEE $6,364,996 $168,764
_________ _________
_________ _________><
2000 $ 5,094
2001 5,443
2002 5,816
2003 6,214
2004 6,639
Thereafter 134,790
________
$163,996
________
________
><
2000 21,600
2002 21,600
2003 21,600
2004 21,600
2005 21,600
Thereafter 37,800
________
$145,800
________
________><#><Selected Five-Year Financial Data><
1999 1998 1997 1996 1995
_______ _______ _______ _______ _______
Results of Operations (000 omitted)
EEEInterest income $7,802 $7,721 $7,388 $ 6,965 $ 6,262
EEEInterest expense 4,119 4,112 3,847 3,694 3,247
EEEProvision for loan losses 190 475 233 96 75
_______ ________ ________ ________ ________
EEENet interest income after
EEEprovision for loan losses 3,493 3,134 3,308 3,175 2,940
EEEOther operating income 621 530 349 270 270
EEEOther operating expenses 3,030 2,772 2,608 2,270 1,954
_______ ________ ________ ________ ________
EEEIncome before income taxes 1,084 892 1,049 1,175 1,256
EEEApplicable income tax 181 110 193 218 254
_______ ________ ________ ________ ________
EEENet income $ 903 $ 782 $ 856 $ 957 $ 1,002
_______ ________ ________ ________ ________
_______ ________ ________ ________ ________
Common Share Data
Per share amounts are based on weighted average shares of common stock
outstanding of 400,000 for 1999, 1998, 1997, 1996 and
1995.
Income before income taxes $ 2.71 $ 2.23 $ 2.62
$
2.94 $ 3.14
Applicable income taxes .45 .28 .48 .55 .64
EEENet income 2.26 1.96 2.14 2.39 2.51
Cash dividend declared 1.00 .81 .80 .77 .77
Book value (actual number of
EEEshares outstanding before
FAS 115 adjustments) 30.42 29.16 28.01 26.68
25.05
Dividend Payout Ratio 44.28% 41.43% 37.39% 32.18% 30.75%
Year-End Balance Sheet Figures
(000 omitted)
Total assets $117,929 $113,565 $106,020 $98,644 $91,921
Net loans 76,137 61,901 59,124 56,260 52,794
Total investment securities D
Book value 31,900 35,348 29,425 33,767 31,944
Deposits D noninterest-bearing 10,959 10,819 9,988 9,250
7,778
Deposits D interest-bearing 88,371 89,685 83,272 77,884
73,1
38
Total deposits 99,330 100,504 93,260 87,134 80,916
Total stockholdersO equity (before
FAS 115 adjustments) 12,167 11,664 11,206 10,670
10,0
21
Ratios (calculated before FAS 115 adjustments)
Average equity/average assets 10.49% 10.53% 10.74% 10.87%
11.5
8%
Return on average equity 7.53% 6.85% 7.98% 9.18% 10.26%
Return on average assets .79% .72% .86% 1.00% 1.19%
><#><Summary of Quarterly Financial Data><The unaudited quarterly results of
operations for the years ended December 31, 1999
and 1998 are as follows:>< 1999 1998
Quarter Ended Quarter Ended
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30
De
c. 31
(000 omitted except per share)
Interest income $1,885 $1,899 $1,968 $2,050 $1,864 $1,913
$1,964 $1,980
Interest expense 1,020 997 1,032 1,070 986 1,016 1,056
1,054
______ ______ ______ ______ ______ ______ ______
____
__
EEENet interest income 865 902 936 980 878 897 908 926
Provision for loan losses 30 36 30 94 101 190 90 94
______ ______ ______ ______ ______ ______ ______
____
__
EEENet interest income after
EEEEEEprovision for loan losses 835 866 906 886 777 707 818 832
Other income 114 126 125 206 85 100 106 96
Security gains (losses) (1) 51 0 0 2 142 ( 1) 0
Other expenses 718 751 756 805 660 684 690 738
______ ______ ______ ______ ______ ______ ______
____
__
EEEOperating income before
EEEEEEincome taxes 230 292 275 287 204 265 233 190
Applicable income taxes 41 56 42 42 49 94 ( 16) ( 17)
______ ______ ______ ______ ______ ______ ______
____
__
EEENet income $ 189 $ 236 $ 233 $ 245 $ 155 $ 171
$
249 $ 207
______ ______ ______ ______ ______ ______ ______
____
__
______ ______ ______ ______ ______ ______ ______
____
__
Net income applicable to common stock
Per share data:
EEENet income $ .48 $ .59 $ .58 $ .61 $ .39 $ .43
$
.62 $ .52
><#><Distribution of Assets, Liabilities and StockholdersO Equity,
Interest Rates and Interest Differential>< Years Ended December 31
1999 1998 1997
(000 omitted) Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest
Ra
te
ASSETS
Interest-bearing
Edeposits with
Ebanks and federal
Efunds sold $ 2,975 $148 4.98% $ 6,098 $332 5.44% $ 3,708
$
202 5.45%
Investment
Esecurities 33,114 1,887 5.70% 33,100 1,939 5.86%
31,52
4 1,915 6.07%
Loans 68,773 5,767 8.39% 60,265 5,450 9.05% 57,794
5,271 9.12%
_______ _______ _______ _______ _______ _______ _______
___
____ _______
EEETotal interest-
EEEearning assets $104,862 $7,802 7.44% $99,463 $7,721 7.76%
$93,026 $7,388
7.94%
_______ _______ _______ _______ _______ ______
_
_______ _______ _______ _______ _______ ______
_
Cash and due
Efrom banks 3,467 2,959 2,770
Bank premises and
Eequipment 3,213 3,240 3,196
Other assets 2,776 2,833 923
_______ _______ _______
EEETotal assets $114,318 $108,495 $99,915
_______ _______ _______
_______ _______ _______
LIABILITIES AND STOCKHOLDERSO EQUITY
Interest-bearing
Etransaction
Eaccounts $ 8,985 $140 1.56% $ 8,521 $ 143 1.68%
$ 6,965 $ 146 2.10%
Money market
Edeposit accounts 7,556 251 3.32% 8,028 294 3.66% 7,123
252 3.54%
Other savings
Edeposits 11,770 270 2.29% 11,482 307 2.67% 12,229
334
2.73%
All time deposits 60,916 3,369 5.53% 57,892 3,357 5.80%
53,016 3,109 5.86%
Liability for
borrowed funds 1,460 89 6.10% 171 11 6.43% 90 6
6.67
%
_______ _______ _______ _______ _______ _______ _______
___
____ _______
EEETotal interest-
EEEbearing
EEEliabilities $ 90,687 $4,119 4.54% $ 86,094 $4,112 4.78%
$79,423 $3,847
4.84%
_______ _______ _______ _______ _______ ______
_
_______ _______ _______ _______ _______ ______
_
Demand deposits 10,849 10,010 8,884
Other liabilities 786 968 875
_______ _______ _______
EEETotal liabilities 102,322 97,072 89,182
StockholdersO equity 11,996 11,423 10,733
_______ _______ _______
EEETotal liabilities
EEEand stockholdersO
EEEequity $114,318 $108,495 $99,915
_______ _______ _______
_______ _______ _______
Net interest
Eincome/net interest
Emargin/margin average
Eearning assets $3,683 3.51% $3,609 3.63%
$3,54
1 3.80%
_______ _______ _______ _______ _______ ______
_
_______ _______ _______ _______ _______ ______
_
><#><Changes in Net Interest Income><
1999 Compared to 1998 1998 Compared to 1997
____________________ ____________________
Total Total
Average Average Increase Average Average Increase
(000 omitted) Volume Rate (Decrease) Volume Rate (Decrease)
________ ________ ________ ________ ________ ________
Interest Income
EEEInterest-bearing deposits
EEEEEEwith banks and
EEEEEEfederal funds sold ($170) ($ 14) ($ 184) $130 $ 0
$130
EEEInvestment securities 1 ( 53) ( 52) 96 ( 72) 24
EEELoans 808 ( 491) 317 225 ( 46) 179
_____ _____ _____ _____ _____ _____
EEEEEETotal interest income $639 ($558) $ 81 $451 ($118) $333
_____ _____ _____ _____ _____ _____
_____ _____ _____ _____ _____ _____
Interest Expense
EEEInterest-bearing transaction
EEEEEEaccounts $8 ($ 11) ($ 3) $ 33 ($ 36) ($ 3)
EEEMoney market deposit accounts ( 17) ( 26) ( 43) 32 10
42
EEEOther savings 8 ( 45) ( 37) ( 20) ( 7) ( 27)
EEEAll time deposits 175 ( 163) 12 286 ( 38) 248
EEELiability for borrowed funds 83 ( 5) 78 5 0 5
_____ _____ _____ _____ _____ _____
EEEEEETotal interest expense $257 ($250) $ 7 $336 ($ 71) $265
_____ _____ _____ _____ _____ _____
_____ _____ _____ _____ _____ _____
EEEEEENet interest income $ 74 $ 68
_____ _____
_____ _____
><#><Maturities of Investment Securities><December 31, 1999
The following table shows the maturities of investment securities at amortized
cost as of December 31, 1999, and weighted average
yields of such securities. Yields are shown on a taxable equivalent basis,
assuming a 34% federal income tax rate.><
Within 1-5 5-10 Over
(000 omitted) 1 Year Years Years 10 Years Total
Obligations of other
EEEU.S. Government agencies:
EEEAmortized cost $551 $4,530 $11,720 $1,526 $18,327
EEEYield 5.66% 5.79% 6.36% 6.79% 6.24%
Obligations of state and
EEEpolitical subdivisions:
EEEAmortized cost 855 1,405 2,415 5,033 9,708
EEEYield 6.73% 7.34% 7.17% 7.30% 7.23%
Mortgage-Backed securities and SBA
EEEGuaranteed Loan Pool Certificates (1):
EEEAmortized cost 7 59 241 2,667 2,974
EEEYield 7.55% 7.94% 6.82% 6.21% 6.30%
________ ________ ________ ________ ________
EEEEEESubtotal amortized cost $1,413 $5,994 $14,376 $9,226
$31,
009
________ ________ ________ ________ ________
________ ________ ________ ________ ________
EEEEEESubtotal yield 6.32% 6.18% 6.51% 6.90% 6.55%
________ ________ ________ ________ ________
________ ________ ________ ________ ________
Equity Securities 891
Yield 5.3%
________
EEEEEETotal investment securities $31,900
________
________
EEEEEEYield 6.52%
________
________
(1) It is anticipated that these mortgage-backed securities and SBA Guaranteed
Loan Pool Certificates will be repaid prior to their
contractual maturity dates.><#><ManagementOs Discussion and Analysis of
Financial Condition
and Results of Operations><The following section presents a discussion and
analysis of the financial condition and results of
operations of FNB Financial Corporation (the Corporation) and its wholly-owned
subsidiary, The First National Bank of
McConnellsburg (the Bank). This discussion should be read in conjunction with
the financial tables/statistics, financial statements
and notes to financial statements appearing elsewhere in this annual report.
RESULTS OF OPERATIONS
Overview
Consolidated net income for 1999 was $903,282, a $121,332, or 15.52% increase
from the net income for 1998 of $781,950, and an
increase of $47,552 or 5.56% from the net income of $855,730 for 1997. On a per
share basis, net income for 1999 was $2.26, based
upon average shares outstanding of 400,000, compared to $1.96 for 1998 and $2.14
for 1997.
Results of operations for 1999 as compared to 1998 were impacted by the
following items:
Net income was positively impacted by a 5.43% increase in average earning
assets due to a 5.65% increase in average deposits, the
result of the increased balances in CDs and IRAs;
Net income was positively impacted by a $284,814 decrease in the provision for
loan losses, from a total of $474,814 in 1998 to
$190,000 in 1999. The decision to substantially increase the allowance in 1998
was based upon several factors:
A more critical analysis of our commercial and consumer loan portfolios
which
resulted in a larger allocation of the allowance
reserved specifically for commercial loans and consumer installment loans.
The observation that the current long-run expanding economic cycle may be
reaching its peak which could result in the slowing
down of our economy.
The instability in the Asian Market, which showed a few signs of
stabilization,
prompted management to assess the Otrickle down
effectsO of a slowing economy and the Asian crisis on businesses in our local
economy and the potential for an increase in past due
loans and delinquency problems; and
The assessment of potential problems businesses could encounter regarding Year
2000 computer issues.
Net income was negatively impacted by a decrease in net gains on the sale of
securities from $143,288 in 1998 compared to
$49,655 in 1999.
Net income was negatively impacted by a decreasing net interest margin of 0.12%
from 3.63% in 1998 to 3.51% in 1999. This
occurred due to a decrease in the yield on earning assets from 7.76% in 1998 to
7.44% in 1999, a direct result of:
A 0.66% decrease in the yield on loans from 9.05% in 1998 to 8.39% in 1999; a
result of declining interest rate indexes on
adjustable rate loans during the first two quarters of 1999 and refinancing of
adjustable rate mortgages to lower fixed rates.
A 0.16% decrease in the yield on investment securities from 5.86% in 1998 to
5.70% in 1999 the result of calls and maturities of
higher yielding securities.
A 0.46% decrease in the yield on federal funds sold and interest-bearing
deposits with banks due to federal funds sales and time
deposit purchases occurring during the first two quarters of 1999 before
interest rates began to rise.
Net income was positively impacted by a decreasing cost of interest-bearing
liabilities of 0.24% from 4.78% in 1998 to 4.54% in
1999, a direct result of:
Decreasing the cost of all interest-bearing transaction accounts, savings
accounts and time deposits during the first two quarters of
1999. This resulted in the following decreases:
Interest bearing transactions accounts from 1.68% to 1.56%.
Money Market deposits from 3.66% to 3.32%.
Savings deposits from 2.67% to 2.29%.
Time deposits from 5.80% to 5.53%.
Net income was negatively impacted by an increase in wage and salary expenses of
$121,763, or 10.78% and employee benefits of
$38,386, or 13.31%, a direct result of:
The addition of a commercial loan officer/loan division manager to senior
management.
Officer and employee raises during the operating year.
Increased participation in our 401K retirement program.
Net income was negatively impacted by a $27,552 increase in net occupancy
expenses and a $16,990 increase in furniture and
equipment expenses as a result of:
A $14,960 increase in real estate taxes as a result of the first full year of
increased real estate tax assessments on the newly
renovated main office facility and Fort Loudon office.
A $8,169 increase in real estate upkeep and repair as a direct result of grounds
management expense increases.
A $5,132 increase in the depreciation expense for bank-owned automobiles as a
result of the addition of two automobiles to our
equipment.
The purchase of an adjacent property in downtown McConnellsburg which increased
depreciation expenses $2,400.
An increase in the cost of equipment repair and maintenance expenses in the
amount of $7,958 as a result of increased maintenance
contracts and expenses for repair of our equipment.
Net income was positively impacted by the demutualization of a life insurance
company which insures a portion of the life
insurance polices on Directors and key executives. This resulted in a gain on
the sale of the stock from the demutualization in the
amount of $64,312.
Net income was positively impacted by a $81,594 increase in the cash value of
life insurance compared to $44,947 in 1998 and
negatively impacted by the premium, deferred compensation and administrative
costs of the DirectorsO and key executivesO life
insurance retirement plan of $64,339 in 1999 compared to $31,677 in 1998.
Net income was negatively impacted by a $70,856 increase in the current year
income tax provision resulting primarily from the
increase in taxable income in relation to tax free income.
Net income as a percent of total average assets for 1999, also known as return
on assets (ROA), was .79% compared to .72% for
1998 and 0.86% for 1997. Net income as a percent of average stockholdersO
equity for 1999, also known as return on equity
(ROE), was 7.53% compared to 6.85% for 1998 and 7.98% for 1996. The ROA and ROE
for these periods were impacted by the
factors discussed in the preceding paragraphs.
Net Interest Income
Net interest income is the amount by which interest income on loans and
investments exceeds interest incurred on deposits and other
interest-bearing liabilities. Net interest income is our primary source of
revenue. The amount of net interest income is affected by
changes in interest rates and by changes in the volume and mix of interest-
sensitive assets and liabilities.
Net interest income for 1999 increased $74,217 or 2.06% over 1998 and $141,954
or 4.01% over 1997. Average earning assets for
1999 increased $5,399,000 over 1998 and $11,836,000 over 1997. This increase in
average earning assets from 1998 to 1999 was
the result of:
An increase in average loans in the amount of $8,508,000 or 14.12%.
An increase in average investment securities in the amount of $14,000 or
0.04%.
A decrease in interest-bearing deposits with banks and federal funds sold in
the amount of $3,123,000 or 51.21%.
The increase in loans at an average yield of 8.39% partially funded by the
decrease in interest-bearing deposits with banks and
federal funds sold at an average yield of 4.98% directly contributed to the
increase in net interest income.
Earning asset increases were funded by an increase in average deposits of
$5,431,000 or 5.65% and in increases in average
borrowing from the Federal Home Loan Bank of $1,289,000. This deposit volume
increase is the result of increases in average
balances of consumer CDs and IRAs of $3,024,000 or 5.22% and in increases of
non-interest bearing demand deposits of $839,000
or 8.38%. The inability of deposits to supply the liquidity for the growth of
earning assets was funded, and continues to be funded,
by borrowings from the Federal Home Loan Bank (FHLB).
The volume growth in earning assets and interest-bearing liabilities contributed
to the increase in net interest income in the amount
of $344,000 in 1999 over 1998.
During 1997 the Federal ReserveOs interest rate policy remained the same as that
of 1996 with the only change occurring at the end
of the first quarter when the Federal Reserve decreased short term interest
rates by 25 basis points. During the first half of 1998,
interest rates remained relatively stable; however, during the latter part of
the third quarter and the beginning of the fourth quarter,
the Federal Reserve decreased short term interest rates three times. As a result
of this decreasing interest rate environment, several
investment securities with call features were called by the issuer resulting in
the loss of higher interest earning assets and several
one-to-four family residential mortgages refinanced to lower interest rates. To
address this decreasing yield on earning assets, we
decreased deposit rates, but not at the same pace as that of earning assets.
During that period, average yields on loans decreased 6
basis points from those of 1997; however, the average yield on investment
securities decreased 21 basis points. As a result of the
aforementioned increase in the average balance of lower yielding investment
securities and interest-bearing deposits with banks, the
average yield on earning assets decreased in 1998 to 7.76%, a .18% decrease from
1997 and .01% decrease from 1996. The average
cost of interest-bearing liabilities during 1998 was 4.78%, a .06% decrease from
1997. This decrease from 1997 was attributable to
our decrease of the cost of interest-bearing liabilities from 1997; however, the
balances of business money market accounts
increased significantly which resulted in an increase in the cost of Money
Market accounts of 12 basis points. The result of these
aforementioned decreases and increases in interest-bearing liabilities was a 42
basis point decrease in the cost of interest-bearing
transaction accounts; a 6 basis point reduction in the cost of Saving accounts;
and a 6 basis point reduction in the cost of time
deposits.
Throughout the first two quarters of 1999, interest rates remained relatively
the same with no major changes in Federal Reserve
interest rate policy. In fact, there were some indications and some
predications interest rates may continue to decrease during this
period. These indications and predictions were quickly put to rest when the FRB
abruptly increased interest rates at the very end of
the second quarter. This initial increase in short term rates began the trend
which resulted in a tightening in monetary policy and
increase in interest rates during 1999 of 75 basis points. During 1999, we
concentrated on the reduction of the cost of deposits. The
result was the following:
A decrease in the cost of interest-bearing transaction accounts by 0.12% to
1.56%.
A decrease in the cost of Money Market accounts by 0.34% to 3.32%.
A decrease in the cost of savings deposits by 0.38% to 2.29%.
A decrease in the cost of time deposits by 0.27% to 5.53%.
These decreases in the cost of deposits were offset by decreasing yields on
earning assets. During the first two quarters of 1999,
mortgage refinancings and decreasing adjustable rate indexes on loans resulted
in lower yields on the entire loan portfolio. Also
during this period investment securities with call features were called as
issuers took advantage of the declining rate market to
reinvest at lower rates for longer terms. The result was the following:
A decrease of 0.46% in the yield on interest-bearing deposits with banks and
federal funds sold.
A decrease of 0.16% in the yield on investment securities.
A decrease of 0.66% in the yield on loans.
The net effect of all interest rate fluctuations was to decrease net interest
income in the amount of $271,000 in 1999 from 1998.
Due to the overall decrease in the yield on earning assets by 0.32%, which was
0.08% more than the 0.24% decrease in the cost of
interest-bearing liabilities, we have experienced a decrease in our net interest
margin during 1999 compared to 1998. The average
net interest margin for 1999 was 3.51% compared to 3.63% for 1998.
We anticipate the yield on earning assets to increase during the next few
quarters as indexes on adjustable rate securities and loans
have increased and commercial loan rates and residential lending rates have all
begun to increase. At the same time the current
rising interest rate environment has placed a halt on all security calls
resulting in a longer term, lower yielding investment portfolio.
The increases in yields in the loan portfolio will result in higher yields on
our earning assets. However, competition for deposits has
greatly increased as depositors are more savvy, being encouraged by a seemingly
endless economic expansion and limitless
opportunities in the stock market to invest their funds in investment vehicles
which offer a more attractive yield than bank deposit
products. The result has forced us to offer higher deposit rates as deposits of
CDs and IRAs had begun to leave the Bank. We have
increased deposit rates on these investment vehicles in order to retain deposits
and tie up rates during a period when it appears as if
interest rates will continue to rise; therefore, fixing rates at lower costs now
will be of benefit to us in the longer term. In order to
offset these deposit losses and continue to fund loan demand, we are utilizing
our line of credit at the FHLB. This funding
alternative is interest rate sensitive in that the rate reprices on a daily
basis. We are working to match borrowings at the FHLB with
specific loans and to utilize term borrowings to tie up interest rates for
longer periods. During this period we anticipate a slight
improvement in our interest margin; however, the improvement will depend greatly
upon present market conditions for both loans
and deposits. Current strategies we are utilizing to improve our interest
spread are as follows:
Promoting special-term fixed rate certificates of deposit before interest rates
rise further and the market forces us to pay higher
interest rates.
Promoting adjustable rate commercial and residential mortgage loan products.
Matching borrowing at the FHLB with specific loan credits.
Retaining the cost of interest-bearing transaction, money market and savings
accounts at their current levels.
Provision for Loan Losses
The loan loss provision is an estimated expense charged to earnings in
anticipation of losses attributable to uncollectible loans. The
provision is based on our analysis of the adequacy of the allowance for loan
losses. The provision for 1999 was $190,000, compared
to $474,814 for 1998, and $232,500 for 1997. This decrease in annual provision
from 1999 to 1998 of $284,814 was the result of
our assessment that the current level of the allowance for loan losses was
sufficient to cover anticipated losses and therefore did not
require the same size addition which was required in 1998. The sizeable
addition in 1998 was determined necessary due to the
following:
A critical analysis in 1998 of our commercial and consumer loan portfolios which
resulted in a larger allocation of the allowance
reserved specifically for commercial loans and consumer installment loans.
The observation that the current long-run expanding economic cycle may be
reaching its peak which could result in the slowing
down of our economy.
The instability in the Asian Market, which showed a few signs of stabilization,
prompted management to assess the Otrickle down
effectsO of a slowing economy and the Asian crisis on businesses in our local
economy and the potential for an increase in past due
loans and delinquency problems.
The assessment of potential problems businesses could encounter regarding Year
2000 computer issues.
Total charged-off loans in 1999 were $201,000 compared to $203,000 in 1998 and
$228,000 in 1997. Total recoveries in 1999 were
$25,000 compared to $34,000 in 1998 and $15,000 in 1997. See discussion on
Allowance for Loan Losses.
Other Operating Income and Other Operating Expenses
Other operating income for 1999 was $620,461, a $90,528 increase over the same
period in 1998 and a $271,791 increase over the
same period in 1997. This increase is mainly attributable to the following:
The demutualization of a life insurance company which insures a portion of the
life insurance polices on Directors and key
executives. This demutualization resulted in a gain on the sale of the stock in
the amount of $64,312.
A $36,647 increase from 1998 to 1999 in the cash value of bank-owned life
insurance. The 1999 cash value increase was $81,594
while the 1998 increase was $44,947.
Service charges on deposit account increasing $38,356 due to increased deposit
accounts, our stricter enforcement of overdraft fees
and an increase in the business minimum balance charge;
A $22,005 increase in commissions received on credit life and credit disability
insurance.
A $9,336 increase in Check/Debit Card discount and merchant Credit Card
Discounts.
A $4,385 increase in income received from service charges associated with our
checking account club program.
A $93,633 decrease in the gains realized on the sale of investment securities.
Total other operating expenses for 1999 increased by $257,371 or 9.28% over 1998
and $421,243 or 16.15%, over 1997. This
increase was mainly the result of the following:
An increase in wage and salary expenses of $121,763, or 10.78% and employee
benefits of $38,386, or 13.31%, a direct result of:
The addition of a commercial loan officer/loan division manager to senior
management.
Officer and employee raises during the operating year.
Increased participation in the our 401K retirement program.
A $27,552 increase in net occupancy expenses and a $16,990 increase in furniture
and equipment expenses due to:
A $14,960 increase in real estate taxes as a result of the first full year of
increased real estate tax assessments on the newly
renovated main office facility and Fort Loudon office.
A $8,169 increase in real estate upkeep and repair as a direct result of grounds
management expense increases.
A $5,132 increase in the depreciation expense for bank autos as a result of the
addition of two automobiles to the bankOs
equipment.
The purchase of an adjacent property in downtown McConnellsburg which increased
depreciation expenses $2,400.
An increase in the cost of equipment repair and maintenance expenses in the
amount of $7,958 as a result of increased maintenance
contracts and expenses for repair of bank equipment.
A $6,634 increase in the cost of communication expenses;
A $9,394 increase in our Pennsylvania Shares tax expense and Maryland property
tax expense;
A $32,662 increase in the expense incurred for the premium, deferred
compensation and administrative costs of the DirectorOs and
key executiveOs life insurance retirement plan.
We have been operating, during the past few years, in an expansion mode, by
increasing our target market through the acquisition of
the Fort Loudon Branch Office in Franklin County, Pennsylvania and the opening
of Hancock Community Bank in Washington
County, Maryland as well as expanding the main office facilities to allow for
future growth and expansion of operations. As a result
of this growth and expansion, other operating expenses increased during the
1999, 1998, and 1997 operational years and will for the
years thereafter, due mainly to the following:
Depreciation of the main office renovation/construction completed on September
1, 1996;
Operational expenses and overhead associated with the operation of Hancock
Community Bank which opened on November 25,
1996; and
Operational expenses and overhead associated with the renovation/expansion of
the Fort Loudon office which were completed in
November 1997 costing approximately $200,000.
These items have decreased our net income as overhead of these operations has
impacted net income. The result has been a decrease
in operational income, earnings per Share, Return on Assets and Return on
Equity. Although this growth mode has reduced income
in the short term, we are confident that in the long term these growth plans
will benefit our income producing ability through the
addition of new customers to our deposit and loan bases and retention of current
customers resulting in increased income.
Income Taxes
Our income tax provision for 1999 was $180,572 compared to $109,716 for 1998 and
$193,122 for 1997. The 1997 provision of
$193,122 includes a $13,551 charge for taxes due as a result of an IRS audit of
our 1996 Federal tax return. Without this additional
1996 tax, our provision for 1997 would have been $179,571. The increase in the
tax provision in 1999 over 1998 in the amount of
$70,856 was due to an increase in income before income taxes of $192,188, a
decrease in tax-free income in the amount of $35,700
and a decrease in the deferred tax adjustment from 1998 to 1999 in the amount of
$88,860. We operated with a marginal tax rate of
34% in 1999, 1998 and in 1997. Our effective tax rate for 1999 was 16.66%
compared to 12.30% for 1998 and 18.41% for 1997.
Future Impact of Recently Issued Accounting Standards
In June, 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133 - OAccounting for Derivative Instruments
and Hedging ActivitiesO effective for fiscal years beginning after June 15,
1999. This statement establishes accounting and
reporting standards for derivative instruments and hedging activities, including
certain derivative instruments embedded in other
contracts, and requires that an entity recognize all derivatives as assets or
liabilities in the balance sheet and measure them at fair
value. If certain conditions are met, an entity may elect to designate a
derivative as follows: E(a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of an unrecognized firm commitment,
an available-for-sale security, a foreign currency denominated forecasted
transaction, or a net investment in a foreign operation. The
statement generally provides for matching the timing of the recognition of the
gain or loss on derivatives designated as hedging
instruments with the recognition of the changes in the fair value of the item
being hedged. Depending on the type of hedge, such
recognition will be in either net income or other comprehensive income. For a
derivative not designated as a hedging instrument,
changes in fair value will be recognized in net income in the period of change.
Management is currently evaluating the impact of
adopting this Statement on the consolidated financial statements, but does not
anticipate that it will have a material impact.
FINANCIAL CONDITION
Investment Securities
The book value of the investment security portfolio as of December 31, 1999,
decreased by $3,735,041 from December 31, 1998,
representing a 10.69% decrease. This decrease occurred primarily due to the
necessity to fund an increase in total loans of
$14,145,000 since December 31, 1998, as total deposits decreased $1,173,999,
borrowings increased $6,196,232, federal funds
decreased $4,136,000, and interest bearing deposits with banks decreased
$1,296,518.
Due to the implementation of SFAS No. 115, we have segregated securities as
Held-to-Maturity (HTM), Available-for-Sale (AFS)
or Trading securities. This accounting standard requires HTM securities be
reported on the balance sheet at cost and AFS securities
be reported at market value. As of December 31, 1999, we had in our portfolio
HTM securities of $1,669,712 with a market value of
$1,556,865 and AFS securities of $28,085,249 with a book value of $29,549,250.
No securities were classified as Trading securities
as of December 31, 1999. For the December 31, 1998, Balance Sheet
presentations, we had investment debt securities classified as
HTM securities of $2,449,621 with a market value of $2,429,959 and as AFS
securities of $32,887,516, with at book value of
$32,504,381. No securities were classified as Trading as of December 31,
1998.
The general policy adopted by us segregates purchases of tax-free municipals
with maturities of 5 years or less as Held-to-Maturity
securities while all other security purchases are classified as Available-for-
Sale. The Policy we adopted also allows us, on a case-by-
case basis, to make a specific determination as to the classification of a
security purchase as Held-to-Maturity or Available-for-Sale
depending upon the reason for purchase. Management adheres to the philosophy
that Held-to-Maturity classifications are typically
used for securities purchased specifically for interest rate management or tax-
planning purposes while Available-for-Sale
classifications are typically used for liquidity planning purposes.
As of December 31, 1999, the net unrealized loss of the HTM portfolio was
$112,847, a 6.76% decrease from book value and on the
AFS portfolio a net unrealized loss of $1,468,005 or a 4.97% decrease from book
value. As of December 31, 1998, the net
unrealized gain on the HTM portfolio was $19,662, a .80% increase from book
value, and on the AFS portfolio, a net unrealized
gain of $383,135 or a 1.18% increase from book value. We have reviewed the
fluctuation of market value in each of these portfolios
and have determined that due to the recent increases in short term interest
rates, the values of securities contained within our
investment debt portfolio are a direct result of the current interest rate
environment. We have therefore, concluded that the net
unrealized gains and/or losses in our investment debt portfolio are a direct
result of current monetary policy and therefore are
temporary in that security values will continue to fluctuate, either decrease or
increase in value, in response to future changes in
interest rates and monetary policy.
Due to the changes in the interest rate environment and a .75% increase in short
term interest rates since June 30, 1999, securities
with call features have not been exercised and we anticipate these securities
will not be called in the near future. As a result of
securities called during 1998 and the first two quarters of 1999 and the changes
in the interest rate environment, the average maturity
of securities in the investment portfolio has increased. This has resulted in a
decrease in liquidity sources available from the
investment portfolio to fund loans demand without selling those securities
classified as available-for-sale which will result in a loss.
We are in the process of reviewing possible sales of securities to fund loan
demand versus the use of borrowing from the FHLB and
the stimulation of deposits through the offering of more attractive interest
rates.
We have purchased for the portfolio mortgage-backed securities but presently
have no Collateralized Mortgage Obligations (CMOs)
in its portfolio. The large portion of these mortgage-backed securities have a
variable rate coupon and all have scheduled principal
payments. During periods of rising interest rates, payments from variable rate
mortgage-backed securities may accelerate as
prepayments of underlying mortgages occur as home-owners refinance to a fixed
rate while during periods of declining interest
rates, prepayments on high fixed rate mortgage-backed securities may accelerate
as home-owners refinance to lower rate mortgages.
These prepayments cause yields on mortgage-backed securities to fluctuate as
larger payments of principal necessitate the
acceleration of premium amortization or discount accretion. Due to the low
dollar amount of mortgage-backed securities in relation
to the total portfolio, we feel the interest rate risk and prepayment risks
associated with mortgage-backed securities will not have a
material impact on our financial condition.
Loans
The total investment in net loans was $76,137,080 at December 31, 1999,
representing a $14,216,499 or 22.96%, increase from the
December 31, 1998, investment of $61,920,581. The primary reasons for the
increase in the loan portfolio were due to the
significant increase in commercial lending activity during 1999. This increase
in commercial lending is a direct result of the hiring
of our Vice President and Loan Division Manager, Mr. William Walker, III, who
was hired for the specific purposes of enhancing
and strengthening our lending operation.
Mr. Walker brought to us a 33 year commercial banking background of which his
last 18 years had been concentrated in commercial
lending. As a member of senior management and in his official capacity as Vice
President/Loan Services Division Manager, Mr.
Walker is in charge of the entire loan department with special emphasis and
concentration on the enhancement, improvement and
growth of our commercial loan portfolio. Mr. WalkerOs addition to senior
management has greatly enhanced our competitive
abilities in the generation of new loans as evidenced by the aforementioned
increase in loan growth.
The composition of our loan portfolio has changed per the following:
A $6,119,000 increase in real estate loans secured by 1 to 4 family residential
properties.
A $2,554,000 increase in Loans secured by nonfarmland, nonresidential properties
due primarily to the new loans secured by
commercial real estate.
A $2,539,000 increase in loans to farmers due to $2,823,000 in purchases of the
100% guaranteed portion of United States
Department of Agriculture Farm Service Agency (USDAFSA) Loans.
A $2,416,000 increase in loans to commercial, industrial and state and political
subdivision loans due primarily to the purchase of
$1,327,000 of the 100% guaranteed portion of Small Business Administration (SBA)
Loans and over $1,100,000 of new commercial
lending.
A $1,474,000 increase in consumer installment loans.
Total new real estate mortgage loan lending for 1999 increased $8,171,000 or
18.59% from December 31, 1998, in comparison to a
$3,200,000 or 7.85% increase in 1998 from December 31, 1997. This increase in
the amount of real estate lending from 1998 to
1999 reflects the closing of several commercial real estate loans and an
increase in residential 1-4 family mortgage loans as
highlighted above. Competitive loan mortgage rates of other institutions and
mortgage companies in our market area during the first
two quarters of 1999 resulted in the refinancing and payoff of mortgage loans
within our loan portfolio; however, we have been able
to attract new mortgage customers through the competitive mortgage products we
offer.
Overall, loan demand during the past year was significantly improved over that
of 1998; however, increased aggressiveness of
competing financial institutions, mortgage loan companies and financing
companies in interest rates and marketing strategies have
resulted in the need for an increased emphasis on loan generation. Our lending
operation has been enhanced by the expertise and
experience of Mr. Walker. His knowledge of the commercial loan business in the
Hagerstown market area has resulted in several
new commercial relationships for us. Our operation in this larger market area
and through the Fort Loudon office in Franklin
County, Pennsylvania and Hancock Community Bank in Washington County, Maryland
greatly improves our ability to generate new
loan relationships.
To encourage new loan demand, we anticipate offering additional loan promotions,
reviewing loan terms for customer
OfriendlinessO and developing a commercial lending strategy to stimulate lending
throughout our market area. In addition, the
continued operation of Hancock Community Bank is anticipated to result in an
increase in lending in the Washington County,
Maryland area as well as in northern Morgan County, West Virginia and southern
Fulton County, Pennsylvania while the continued
operation of the recently expanded and improved Fort Loudon Office is
anticipated to stimulate lending in the Franklin County,
Pennsylvania market.
Nonperforming Assets
Nonperforming loans consist of nonaccruing loans and loans 90 days or more past
due. Nonaccruing loans are comprised of loans
that are no longer accruing interest income because of apparent financial
difficulties of the borrower. Interest on nonaccruing loans
is recorded when received only after past due principal and interest are brought
current.
Other real estate owned includes assets acquired in settlement of mortgage loan
indebtedness and loans identified as impaired loans.
These assets are carried at the lower of cost or fair value. The other real
estate balance as of December 31, 1999, was $165,603
compared to $370,511 as of December 31, 1998. The following actions indicate we
are actively pursuing the sale of all properties
contained in Other Real Estate as shown by the following:
In February 1998, we entered into a lease purchase agreement on a 1 to 4
family residential property on Lincoln Way East in
McConnellsburg.
In February, 1999, we exchanged a 1 to 4 family residential property on Lincoln
Way East in McConnellsburg with the Bishop
Raker Post 655 of the Fulton Overseas Veterans Association (FOVA) as a partial
payment for the purchase of the property located at
115 1/2 Lincoln Way West which is adjacent to our property in downtown
McConnellsburg.
In April, 1999, we entered into a sales agreement for a properly located in
Harrisonville, PA.
In August 1999, we entered into a sales contract for a building lot in
Chambersburg, PA.
In November 1999 we entered into a sales agreement for a property located on the
Tuscarora Mountains east of McConnellsburg.
In December, 1999, we negotiated the sale of a 1 to 4 family residential
property in Hagerstown, Maryland.
Properties contained in Other Real Estate are listed with a realty firm on a
contractual basis. The realty firm is evaluated every six
months on its effectiveness in marketing and selling these properties.
Allowance for Loan Losses
The allowance is maintained at a level to absorb potential future loan losses
contained in the loan portfolio and is formally reviewed
by us on a quarterly basis. The allowance is increased by provisions charged to
operating expense and reduced by net charge-offs.
Our basis for the level of the allowance and the annual provisions is our
evaluation of the loan portfolio, current and projected
domestic economic conditions, the historical loan loss experience, present and
prospective financial condition of the borrowers, the
level of nonperforming assets, and other relevant factors. While we use
available information to make such evaluations, future
adjustments of the allowance may be necessary if economic conditions differ
substantially from the assumptions used in making the
evaluation.
The allowance for loan losses was increased to $746,067 from the prior year
level of $731,641. The ratio of the allowance to net
loans was 0.97% at December 31, 1999, and 1.17% at December 31, 1998. After U.
S. Government Agency, specifically the Small
Business Administration (SBA) and Farm Service Agency (FSA), guaranteed portions
are subtracted from the net loan balance, the
ratio of the allowance to unguaranteed loans increases to 1.09%. We believe the
current level of the allowance for loan losses of
$746,067 is adequate to meet any potential loan losses; but, we have budgeted a
monthly addition during 2000 of $15,000 in
anticipation of potential commercial loan problems and general increases in the
total loan portfolio.
Liquidity and Rate Sensitivity
Our optimal objective is to maintain adequate liquidity while minimizing
interest rate risk. Adequate liquidity provides resources for
credit needs of borrowers, for depositor withdrawals, and for funding Corporate
operations. Sources of liquidity are maturing
investment securities; maturing overnight investments in federal funds sold;
maturing investments in time deposits at other banks;
readily accessible interest-bearing deposits at other banks; payments on loans,
mortgage-backed securities and SBA Guaranteed
Loan Pool Certificates; a growing core deposit base; and borrowings from the
FHLB.
In order to assure a constant and stable source of funds, we are a member of the
Federal Home Loan Bank of Pittsburgh. This
membership assures us the availability of both short term and long term fixed
rate funds. As of December 31, 1999, we had
borrowings of $6,364,996 from this institution and had readily available to us
over $31,000,000 in additional borrowing capacity.
Borrowings from the FHLB as of December 31, 1999, were comprised of the
following:
A $2,500,000 quarterly adjustable Advance Maturing on December 17, 2004,
repricing on March 17, 2000.
A $1,000,000 fixed rate advance maturing on January 6, 2000.
A $1,500,000 fixed rate advance maturing on January 7, 2000.
A $1,201,000 advance on a line of credit which reprices on a daily basis.
A $163,996 fixed rate advance maturing on July 17, 2017.
The objective of managing interest rate sensitivity is to maintain or increase
net interest income by structuring interest-sensitive
assets and liabilities in such a way that they can be repriced in response to
changes in market interest rates. Based upon contractual
maturities of securities and the capability of NOW, Money Market, Savings
accounts and over $6,000,000 of borrowings from the
FHLB to be repriced within the 3 month time horizon, we have maintained a
negative rate sensitivity position, in that, rate sensitive
liabilities exceed rate sensitive assets. Therefore, in a period of declining
interest rates our net interest income is generally enhanced
versus a period of rising interest rates where our net interest margin may be
decreased. However, in a period of declining interest
rates, more securities with call features will most likely be called and be
reinvested into lower yielding investments resulting in the
loss of higher interest earnings assets. Declining rate environments also
result in the likelihood of residential home mortgage
customer to refinance their existing mortgage to lower interest rates. This
movement of securities and loans to lower interest rates
during a declining rate environment has the effect of decreasing our net
interest margin.
Presently, interest rates are anticipated to increase further resulting in an
increased cost of deposits and borrowings from the FHLB
while a portion of our adjustable rate loans and securities are repricing to
higher interest rates. This increasing interest rate
environment and possibility of higher interest rates in the future have resulted
in much less liquidity in investment debt securities as
call features of U. S. Government Agencies and State and Municipal subdivisions
in the U. S. are not being exercised by the issuer.
The anticipated result of this current position will be a gradual increase in
the yield on earning assets. We have also undertaken the
position of maintaining the cost of interest-bearing liabilities on Super NOW,
consumer Money Market and Savings accounts while
increasing and offering special interest rates on Time Certificates of Deposit.
Following these actions, we expect our net interest
spread and interest margin to increase slightly during the next few months. We
continually review interest rates on those deposits
which can be changed immediately, specifically NOW accounts, Money Market
Accounts, and Savings Accounts to determine if
interest rate changes are necessary to maintain our net interest spread and net
interest margin.
Another impact on our net interest spread and interest margin has been the low
loan to deposit ratio which indicates how much of
our deposits are invested in the loan portfolio. This ratio is a primary
indicator of a BankOs liquidity position as the higher the ratio,
the less liquid assets are available to fund deposit withdrawals. At the same
time, this ratio also indicates to us how many deposits
are offset by our highest yielding earning assets, loans; therefore, the higher
the ratio, the more deposits are invested in loans and the
less invested in lower yielding investment debt securities. The result of a
higher loan to deposit ratio is usually a higher net interest
spread and margin. We have targeted as our optimal loan to deposit ratio 75% to
90% with a target of 83.96% by December 31,
2000. The loan to deposit ratio at December 31, 1999, was 76.65%; at December
31, 1998, it was 61.61%; and at December 31,
1997, it was 63.40%. This increase of 15.04% from December 31, 1998, and
increase of 13.25% from December 31, 1997, occurred
due to deposit decrease during 1999 of $1,173,999 and loan growth of
$14,216,499. The addition of an experienced commercial
lender has generated commercial lending which has resulted in this increased
loan to deposit ratio.
To minimize the risk of our rate sensitivity position, we employ many different
methods to diversify our risk both on the asset and
the liability side of the Balance Sheet. The Bank offers both fixed rate and
floating/adjustable rate loans to our customers. At
December 31, 1999, the BankOs floating and adjustable rate loans totaled
$31,966,000, or 40.86% of the total loan portfolio. As of
December 31, 1998, the BankOs floating and adjustable rate loans totaled
$28,317,000, 44.19% of the total loan portfolio. This
percentage decrease of adjustable rates is due in part to lower fixed rate
mortgages which have resulted from the refinancing of
adjustable rate 1-4 family mortgages to fixed rate mortgages. The bankOs debt
security investment portfolio as of December 31,
1999, was comprised of a book value of $2,341,556, or 7.55% of floating rate
debt securities which reprice annually or more
frequently while at December 31, 1998, the BankOs debt security investment
portfolio was comprised of a book value of
$3,376,000, or 9.73% of floating rate securities. Specific methods which we
have employed to address the rate sensitive position are
the offering of the following deposit products to encourage the movement of
short term deposits to longer term deposits: special
term certificates of deposit with competitive interest rates over one year in
term and three year annual adjustable certificates of
deposit.
Our interest rate sensitivity analysis as of December 31, 1999, based upon our
historical prepayment analysis of loans and mortgage-
backed securities, contractual maturities, and the earliest possible repricing
opportunity for loans and deposits is as follows:
Market Risk Management
We have risk management policies to monitor and limit exposure to market risk.
By monitoring reports which assess our exposure
to market risk, we strive to enhance our net interest margin and take advantage
of opportunities available in interest rate movements.
The continual monitoring of liquidity and interest rate risk is a function of
ALCO reporting. Upon review and analysis of these
reports, we determine the appropriate methods we should utilize to reprice our
products, both loans and deposits, and the types of
securities we should purchase in order to achieve desired net interest margin
and interest spreads. We continually strive to attract
lower cost deposits, competitively price our time deposits and loan products in
order to maintain favorable interest spreads while
minimizing interest rate risk.
The following table sets forth the projected maturities and average rate for all
rate sensitive assets and liabilities. The following
assumptions were used in the development of this table:
All fixed and variable rate loans were based on the original maturity of the
note.
All fixed and variable rate U. S. Agency and Treasury securities and obligations
of state and political subdivisions in the U.S. were
based upon the contractual maturity date.
All fixed and variable rate Mortgage-backed securities and SBA GLPCs were based
upon original maturity as the Bank has not
experienced a significant prepayment of these securities.
We have experienced very little run-off in its history of operations and have,
until recently, experienced net gains in deposits.
We have large business and municipal deposits in noninterest bearing checking
and savings and interest-bearing checking. These
balances may fluctuate significantly. Therefore, a 50% maximum runoff of both
noninterest-bearing checking and savings and
interest-bearing checking was used as an assumption in this table.
One large municipal deposit account alternates between the two local community
banks every two years. This deposit account,
with an average balance in excess of $1,000,000, has been assumed to return to
our institution in 2000 and leave in 2002 and
continue this cycle every two years.
Fixed and variable rate time deposits were based upon original contract maturity
dates.
Capital
The primary method by which we increase total stockholdersO equity is through
the accumulation of earnings. We maintain ratios
that are well above the minimum total capital levels required by federal
regulatory authorities including the new risk-based capital
guidelines. Regulatory authorities have established capital guidelines in the
form of the Oleverage ratioO and Orisk-based capital
ratios.O Our leverage ratio, defined as total stockholdersO equity less
intangible assets to total assets, was 9.36% as of December 31,
1999, compared to 10.34% as of December 31, 1998. The risk-based ratios compare
capital to risk-weighted assets and off-balance-
sheet activity in order to make capital levels more sensitive to risk profiles
of individual banks. A comparison of our capital ratios to
regulatory minimums at December 31 is as follows:
We have traditionally been well-capitalized with ratios well above required
levels and, we expect equity capital to continue to
exceed regulatory guidelines and industry averages.
Certain ratios are useful in measuring the ability of a company to generate
capital internally. The following chart indicates the
growth in equity capital for the past three years.
STOCK MARKET ANALYSIS AND DIVIDENDS
Our common stock is traded inactively in the over-the-counter market. As of
December 31, 1999, the approximate number of
shareholders of record was 438.
Year 2000 Readiness Plan
Due to the age of some computer programs, computer software and computer chips,
it was very possible that some older computers,
software and equipment containing computer chip technology would not function
properly when the year 2000 rolled around, or
would not function at all. With this in mind, we implemented our Year 2000
readiness plan in 1997.
AWARENESS
We recognized this potential problem in mid-1997 and organized a Year 2000
Management Team. This team was headed by Senior
Management and the Data Processing Department, and reported findings and results
to the CEO, the Electronic Data Processing
(OEDPO)Committee and, ultimately, to the Board of Directors. In September 1997,
this team developed and implemented a Year
2000 policy to assure that all of our computers, software and equipment would be
compatible with the year 2000 in order to avoid
disruption to financial services provided to our customers.
Beginning in March 1997, we began discussions with our Computer equipment
providers and programmers regarding the Year 2000
issue and how it would effect our processing capabilities. In September 1997,
our EDP Committee, comprised of four outside
Directors, the Data Processing Manager, Cashier and CFO, and the Board of
Directors adopted a Year 2000 Action Plan which has
been implemented. This plan appointed the CFO in charge of the Year 2000
project implementation as supervisor of the Data
Processing Department.
ASSESSMENT
Pursuant to our Plan, we inventoried equipment and software which needed to be
verified for Year 2000 compliance. We also
outlined our testing dates and strategies, completion dates for all
reprogramming and testing, and a contingency plan. In addition,
the Plan required all vendors and business customers provide Year 2000
compliance assurances. Further, any new equipment or
computer software purchased from that date forward must have been certified by
the vendor to be Year 2000 compatible.
In our policy addressing the Year 2000, we recognized the importance of
assuring, to the best of our ability, our major business
customers and vendors on which we rely for electricity, voice communication,
data processing, all equipment, data communication,
supplies, and any other function vital to the our operation were aware of this
issue and had addressed it within their organizations by
having their computer equipment and software analyzed and tested for
compatibility with the Year 2000. To assess the status of
each major business customer and vendor, in November 1997 we sent to each a
short questionnaire/survey regarding their Year 2000
implementation plans. As each vendor and business customer returned the survey,
our team assessed the capability of each and
followed up to assure, to the best of the our ability, each was Year 2000
compatible, or would be by June 30, 1999.
RENOVATION, VALIDATION, AND IMPLEMENTATION
On Sunday, February 15 and Monday, February 16, 1998, and on Sunday, February
14, 1999, and Monday, February 15, 1999, data
processing personnel conducted an in-house test of all computer equipment and
programs, both our main frame and Local Area
Network (OLANO), in order to determine if there were any areas of concern. All
equipment worked fine after we allowed system
dates on the main frame and the LAN to roll-over from December 31, 1999, to
January, 1, 2000. After the date roll-over we tested
programs extensively performing regular daily procedures as well as year-end
close out procedures. There were some minor
problems which resulted, many of which we were aware before testing and had
previously discussed with our programmers. We set
June 30, 1998, as the dead-line for necessary changes to be made by our
programmers. This schedule was met and retesting
occurred during the third and fourth quarters of 1998. Our internal final cut-
off for compliance was December 31, 1998, in order to
allow for any unforeseen problems to be addressed in early 1999.
On May 28, 1998, system dates on the main frame were tested for September 9,
1999, January 1, 2000, January 3, 2000, February
29, 2000, and March 1, 2000. These tests were performed by having the system
date rolled over to make sure the system continued
to operate. There were no problems encountered. During retesting procedures of
our main frame in the third and fourth quarters of
1998, we performed more extensive testing of these dates. Retesting of the main
frame occurred at our test location hot site at CBM.
Those reports generated were reviewed in detail by our in house processor, Data
Processing Manager, CFO, personnel from The
First National Bank of Mercersburg and our chief banking programmer at CBM. All
areas were tested to assure compliance and
renovations were made as necessary.
System dates on the LAN were tested for September 9, 1999, January 1, 2000,
January 3, 2000, and February 29, 2000. Testing for
September 9, 1999, was conducted on Monday June 8, 1998, when the system date
was moved forward on the LAN to September 8,
1999, and allowed to roll-over to September 9, 1999. On Tuesday June 9, 1998,
the date was September 9, 1999, on the LAN. All
day system dates were on this time and the system was allowed to roll over to
September 10, 1999, on June 10, 1998. On June 10,
1998, the date was returned to normal. No problems were incurred.
On June 15, 1998, the date was changed on the LAN to December 31, 1999, and
allowed to roll over to January 1, 2000, on June 16,
1998. All day processing was done on this date. The system date remained in
the year 2000 until Friday, June 19, 1998, on which
date the future date was January 4, 2000, the second business day in the year
2000. The system was returned to the proper date
following this test. There were no problems encountered. The Losendos program
(a Qantel terminal emulation program) displayed,
in an auxiliary field, the date at 2010. This is not used in calculations and
is only used to show date and time for the user of the
system, and did not disrupt operations.
On June 22, 1998, the date was changed to February 27, 2000, and allowed to roll
over to February 28, 2000, on Tuesday, June 23,
1998; to February 29, 2000 on Wednesday, June 24, 1998; and to March 1, 2000, on
Thursday, June 25, 1998. On June 25, 1998,
the system date was returned to the correct date. There were no problems
encountered other than the credit reporting software to
pull credit reports not recognizing the Date February 29, 2000. This was
verified with the software vendor who informed us the full
year 2000 needed to be input in order to recognize the year 2000 as a leap year.
The Losendos program, which is a Qantel terminal
emulation program, displays in an auxiliary field the date at 2010. This is not
used in calculations and is only used to show date and
time for the user of the system. This did not disrupt operations.
The purpose of these tests was to assure the LAN and all programs on the LAN
will operate properly on these various dates. Each
department was asked to track their usage of programs during this period and to
note any problems which were encountered so they
could be addressed as quickly as possible with our software vendor.
We completed certification testing with the MAC network for ATM communications
having had MAC successfully process our
Year 2000 test files. A copy of this certification is available.
We tested our electronic communication ability with its correspondent Bank,
ACBB. These tests were completed in December 1998
and no problems were encountered.
We tested our electronic communications with the Federal Reserve Bank of
Philadelphia (OFRBO) during the third and fourth
quarters of 1998. Management scheduled times with the FRB to test year 2000
compatibility of the following customer applications:
a. Wire transfers;
b. TT&L;
c. ACH;
d. Electronic Check Presentment;
e. Cash Ordering and Early Credit;
f. Reserve Requirements;
g. Account Balance Monitoring;
h. Savings Bond Ordering;
i. Check Returns;
j. Account Statements.
Tests of electronic communications with the Federal Reserve Bank of Philadelphia
were conducted throughout the third and fourth
quarters of 1998. All tests performed appeared to be successfully processed by
the Federal Reserve. We reviewed detailed
printouts and testing documentation to verify the successfulness of each test
performed.
SUMMARY OF PHASES OF YEAR 2000 PLAN
All phases of Year 2000 have been completed and in managementOs opinion our
transition from 1999 to 2000 was very successful
with no disruption to customer services. The following table summarizes our
Year 2000 process.
Year 2000 Contingency Plan
A contingency plan had been developed and reviewed by management and the Board.
This plan addressed potential problems which
may have arisen concerning Year 2000 problems.
Our Year 2000 Contingency Plan was developed to address the possibility that
information technology and non-information
technology systems may not function properly after December 31, 1999. If we
have to implement our contingency plan, the
following areas have been included in such plan: the mission-critical Qantel
System; the LAN management information reporting
system; the ATM and MAC networks; Fedline, which included wire transfers,
automated clearing house and electronic check
presentment; electricity; communications; and cash reserves. This plan will
serve as our contingency plan for disruption to mission
critical systems should an event occur which would necessitate such.
YEAR 2000 BUDGET
The initial Budget approved by the EDP Committee and the Board for Year 2000
renovations had been $25,000 which had been
updated to $30,000 in mid 1999. These costs budgeted included specific costs
dealing with the renovation, supplies, upgrades,
postage, education of customers, legal fees for reviewing documents, personnel
costs for testing, and new equipment and software
necessary to become Year 2000 compatible. This budget did not include cost
accounting costs such as salaried personnel time
involved by in house employees. The reason for this exclusion was that the
salaried personnel working on this issue are required to
complete these tasks along with their other duties. The approximate total costs
incurred for Year 2000 costs as highlighted in this
section have been $28,500.00.><#><ManagementOs Discussion and Analysis of
Financial Condition
and Results of Operations><#><ManagementOs Discussion and Analysis of Financial
Condition
and Results of Operations><#><ManagementOs Discussion and Analysis of Financial
Condition
and Results of Operations><#><ManagementOs Discussion and Analysis of Financial
Condition
and Results of Operations>< After After
Within 3 but 1 but After Non-
3 Within Within 5 Interest-
(000 omitted) Months 12 Months 5 Years Years Bearing Total
ASSETS:
Federal funds
EEsold $ 28 $ 0 $ 0 $ 0 $ 0
$ 28
Investment Securities
EE(Book Value) 3,643 967 5,936 21,113 0 31,659
Interest-bearing balances
EEdue from banks 0 0 688 0 0 688
Loans 13,379 15,740 17,544 30,804 423 77,890
Unearned discount &
EEallowance for
EEloan losses (1) 0 0 0 (2,095) 0 (2,095)
Noninterest earning
EEassets 10,358 10,358
______ ______ ______ ______ ______ ______
Total assets $17,050 $16,707 $24,168 $49,822 $10,781 $118,528
______ ______ ______ ______ ______ ______
______ ______ ______ ______ ______ ______
LIABILITIES:
NOW accounts &
EEsavings accounts $27,795 $ 0 $ 0 $ 0
$
0 $ 27,795
Time deposits 11,589 21,058 27,911 10 0 60,568
Noninterest-bearing
EEdeposits 0 0 0 0 10,819 10,819
Other borrowed money 6,201 0 0 164 0 6,365
Other noninterest-bearing
EEsources to fund earning
EEassets 0 0 0 0 888 888
______ ______ ______ ______ ______ ______
Total liabilities $45,585 $21,058 $27,911 $ 174 $11,707 $106,4
35
______ ______ ______ ______ ______ ______
______ ______ ______ ______ ______ ______
Interest sensitivity gap ($28,535) ($ 4,351) ($ 3,743) $
49,648
Cumulative interest
EEsensitivity gap ( 28,535) ( 32,886) ( 36,629) 13,019
Gap ratio 0.37 0.79 0.87 N/A
Cumulative gap ratio 0.37 0.51 0.61 1.14
(1) THESE HAVE BEEN ARBITRARILY ASSIGNED TO THE OAFTER FIVE YEARSO CATEGORY FOR
PURPOSE OF
ANALYSIS.><#><ManagementOs Discussion and Analysis of Financial Condition
and Results of Operations>< Principal/Notional Amount Maturing in Fair
(in millions) 2000 2001 2002 2003 2004 Thereafter Total Value
Rate Sensitive Liabilities
Noninterest-Bearing
Checking $ 2740 $ 685 $ 685 $ 685 $ 685 $ 0 $ 5480
$
5480
Average Interest Rate 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
0.00%
Savings and Interest-
Bearing Checking $ 6892 $ 1723 $ 723 $1723 $2723 $ 0
$
13784 $13784
Average Interest Rate 2.26% 2.26% 2.26% 2.26% 2.26% 0.00%
2.26%
Fixed Interest Rate
Time Deposits $22791 $12760 $6758 $5589 $2759 $ 9 $50666
$51149
Average Interest Rate 5.30% 5.73% 6.10% 5.91% 5.18% 4.99%
5.58%
Variable Interest Rate
Time Deposits $ 2618 $ 4705 $2814 $ 0 $ 0 $ 0 $10137
$10137
Average Interest Rate 5.50% 5.23% 4.77% 0.00% 0.00% 0.00%
5.17%
Fixed Interest Rate
Borrowings $ 6201 $ 0 $ 0 $ 0 $ 0 $ 164 $
6365 $ 6358
Average Interest Rate 4.90% 0.00% 0.00% 0.00% 0.00% 6.64%
4.94%
Principal/Notional Amount Maturing in Fair
(in millions) 2000 2001 2002 2003 2004 Thereafter Total Value
Rate Sensitive Assets
Interest-Bearing
Deposits $ 35 $ 93 $ 95 $ 419 $ 81 $ 0 $ 723
$
723
Average Interest Rate 4.06% 5.83% 5.10% 5.72% 5.72% 0.00%
5.52%
Fixed Interest
Rate Loans $ 1434 $ 2578 $3719 $4425 $2913 $31196 $46265
$45616
Average Interest Rate 9.28% 9.82% 9.41% 8.40% 8.00% 8.24%
8.45%
Variable Interest
Rate Loans $ 6062 $ 904 $ 278 $ 683 $ 910 $23130 $31967
$31886
Average Interest Rate 8.84% 8.30% 8.12% 7.79% 8.09% 8.16%
8.28%
Fixed Interest Rate U.S.
Agency and Treasury
Securities $ 551 $ 580 $ 551 $2500 $ 899 $13246 $18327
$17298
Average Interest Rate 5.66% 5.62% 5.23% 5.91% 5.91% 6.41%
6.23%
Fixed Interest Rate
Mortgage-Backed &
SBA GLPC Securities $ 3 $ 0 $ 3 $ 27 $ 0 $
599 $ 632 $ 603
Average Interest Rate 8.74% 0.00% 8.97% 9.18% 0.00% 6.30%
6.45%
Variable Interest Rate
Mortgage-Backed &
SBA GLPC Securities $ 4 $ 16 $ 0 $ 13 $ 0 $
2309 $ 2342
$ 2336
Average Interest Rate 6.75% 6.96% 0.00% 6.25% 0.00% 6.25%
6.26%
Fixed Interest Rate
Obligations of State
and Political
Subdivisions in
the U.S. $ 855 $ 470 $ 320 $ 115 $ 500 $ 7448 $ 9708
$
9203
Average Interest Rate 6.73% 6.71% 7.00% 7.31% 8.17% 7.26%
7.23%
FNB Financial Corporation Regulatory
Minimum
1999 1998 1997 Requirements
Leverage ratio 9.36% 10.34% 10.56% 4.00%
Risk-based capital ratio
ETier I (core capital) 15.39% 17.12% 18.09% 4.00%
ECombined Tier I and
ETier II (core capital plus
Eallowance for loan losses) 16.43% 18.21% 18.79% 8.00%
><#><ManagementOs Discussion and Analysis of Financial Condition
and Results of Operations>< 1999 1998 1997
Equity capital at December 31
before FAS 115 adjustments and
reduced by intangible assets
E(000 omitted) 12,167 11,664 11,206
Equity capital as a percent of
Eassets at December 31 10.23% 10.29% 10.41%
Return on average assets 0.79% 0.72% 0.86%
Return on average equity 7.53% 6.85% 7.98%
Cash dividend payout ratio 44.28% 41.43% 37.39%
Market Cash Market Cash
Price Dividend Price Dividend
1999 1998
Hi-Low Hi-Low
First Quarter $53 - $58 $0.18 $57 - $50 $0.17
Second Quarter $56 - $58 $0.19 $57 - $57 $0.18
Third Quarter $55 - $57 $0.20 $57 - $51 $0.19
Fourth Quarter $55 - $57 $0.43 $57 - $53 $0.27
><#><ManagementOs Discussion and Analysis of Financial Condition
and Results of Operations><Resolution Awareness & Validation Renovation
Implementation
Phases Assessment
Mission Critical 100% 100% 100% 100%
Qantel Equipment Complete Complete Complete Complete
Mission Critical 100% 100% 100% 100%
Qantel Software Complete Complete Complete Complete
Local Area 100% 100% 100% 100%
Network Complete Complete Complete Complete
Fedline Equipment 100% 100% 100% 100%
and Software Complete Complete Complete Complete
Mission Critical 100% 100% 100% 100%
Equipment With Complete Complete Complete Complete
Embedded Chips
Major Business 100% 100% N/A N/A
Customers Complete Complete
Major Bank 100% 100% N/A N/A
Vendors Complete Complete><#><ManagementOs Discussion and Analysis of
Financial Condition
and Results of Operations><#>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,565
<INT-BEARING-DEPOSITS> 723
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28,085
<INVESTMENTS-CARRYING> 1,670
<INVESTMENTS-MARKET> 1,557
<LOANS> 76,883
<ALLOWANCE> 746
<TOTAL-ASSETS> 117,929
<DEPOSITS> 99,330
<SHORT-TERM> 3,701
<LIABILITIES-OTHER> 1,033
<LONG-TERM> 2,664
0
0
<COMMON> 252
<OTHER-SE> 10,949
<TOTAL-LIABILITIES-AND-EQUITY> 117,929
<INTEREST-LOAN> 5,765
<INTEREST-INVEST> 1,855
<INTEREST-OTHER> 182
<INTEREST-TOTAL> 7,802
<INTEREST-DEPOSIT> 4,030
<INTEREST-EXPENSE> 4,119
<INTEREST-INCOME-NET> 3,683
<LOAN-LOSSES> 190
<SECURITIES-GAINS> 50
<EXPENSE-OTHER> 3,030
<INCOME-PRETAX> 1,084
<INCOME-PRE-EXTRAORDINARY> 1,084
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 903
<EPS-BASIC> 2.26
<EPS-DILUTED> 2.26
<YIELD-ACTUAL> 3.51
<LOANS-NON> 423
<LOANS-PAST> 166
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 732
<CHARGE-OFFS> 201
<RECOVERIES> 25
<ALLOWANCE-CLOSE> 746
<ALLOWANCE-DOMESTIC> 746
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 52
</TABLE>
